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ACCOUNTANTS  '     REPORTS 

By 

William  H.  Bell,  M.C.S.,  C.P.A. 

Member  of  the  American  Institute  of 
Accountants;  Certified  Public  Account- 
ant of  the  States  of  New  York,  Ohio, 
Maryland,  Missouri,  Oklahoma,  Colorado, 
and  Louisiana;  Member  of  the  firm  of 
Raskins  and  Sells 


New  York 

•THE  RONALD  PRESS  COMPANY 

1921 

40045^ 


Bus.  Admin. 
Library 


5G8I 

R4B4 

192/ 


Copyright,  1921,  by 
THE  RONALD  PRESS  COMPANY 


To  Charles  E.  Morris,  C.P.A. 

This  work  is  dadicated  in  grateful  appreciation 
of  his  wise  counsel. 


I 


I 


CONTENTS 


Chapter  P^S^ 

I    INTRODUCTORY 10 

Growing  Importance  of  Reports 

More  Luoid  Financial  Statements  Desired 

Need  of  Uniform  Procedure 

Designation  of  Statements 

Mechanical  Features  and  Necessity  of  Precision 

Audit  Report  Defined 

Character  and  Scope  of  Report 

Parts  of  Report 

II    BALANCE  SHEETS  (Forms  1-15)  20 

"Balance  Sheets"  and  ''General  Balance  Sheets" 
Arrangement  of  Items 

Form  Proposed  by  the  Federal  Reserve  Board 
Remarks  on  Differences  in  Practice  Regarding  Cap- 
tions 
Current  Assets 

Cash 

Working  Funds 

Notes  and  Acceptances  Receivable 

Accounts  Receivable 

Temporary  Investments 

Accrued  Interest  Receivable 

Inventories 
Investments 
Sinking  Fund 
Property 

Good-Will,  Patents,  Trade-Marks,  etc. 
Deferred  Charges 

Unamortized  Debt  Discount  and  Expense 

Experimental  Expenses 

Unamortized  Improvements  to  Leased  Property 

Unamortized  Organization  Expenses 
Current  Liabilities 

Notes  and  Acceptances  Payable 

Accoiints  Payable 

Dividends  Payable 

Accrued  Wages 

Accrued  Taxes 

Accrued  Interest 
Funded  Debt 
Deferred  Credits 


Chapter  Page 

Reserves 

Depreciation 

Doubtful  Acoounts 

Donated  Treasury  Stock 

Sinking  Fund 

Contingencies 
Capital  Stock 
Surplus 

Capital  (Sole  Proprietorship  or  Partnership) 
Contingent  Assets  and  Liabilities 
Undeclared  Dividends  on  Cumulative  Preferred 

Stock 
Comparative  Balance  Sheets 
Description  of  Forms  1-15 

III   INCOME  AND  PROFIT  AND  LOSS  STATEMENTS  (Forms 

16-31) 89 

Titles  of  Statements 
Classifications 

General  Arrangement  for  a  Manxifacturlng  or  Trad- 
ing Corporation 
Gross  Sales 
Deductions  from  Sales 
Net  Sales 

Cost  of  Goods  Sold 
Gross  Profit 
Selling  Expenses 
General  Expenses 
Profit  from  Operations 
Other  Income  Credits 
Income  Charges 

Profit  and  Loss  Credits  and  Charges 
Variations  in  Form  for  Special  Pxirposes 
Statements  Covering  More  Than  One  Period 
Operations  of  Departments,  etc. 
Statistics,  etc. 
Description  of  Forms  16-31 

IV   CONSOLIDATED  STATEMENTS  (Forms  32-38)  143 

General  Remarks 

Two  Classes  of  Statements 

Elimination  of  Inter-Company  Balances  smd 

Transactions 
Stocks  of  Subsidiary  Companies  on  Books  of 

Holding  Company 


Chapter  ZM^ 

Partial  Ownership 

Inter-Company  Profit  in  Inventories 
Names  of  Subsidiary  Companies  in  Report 
Description  of  Forms  32-38 

V    MISCELLANEOUS  STATEMENTS  (Forms  39-50) 168 

Schedules 

Statements  of  Cash  Receipts  and  Disbursements 

Statements  of  Adjustments 

Statements  of  Realization  and  Liquidation 

VI    COMMENTS 186 

General  Remarks 

Order  of  Arrangement 

Importance  of  Language  and  Style 

Use  of  Captions 

Comments  on  Balance  Sheet  Items 

Cash 

Notes  and  Acceptances  Receivable 

Acooionts  Receivable 

Accrued  Interest  (And  Similar  Items)  Receiv- 
able 

Inventories 

Securities 

Sinking  Fund 

Property 

Good-Will,  Patents,  Trade-Marks,  etc. 

Deferred  Charges 

Notes  and  Acceptances  Payable 

Accotints  Payable 

Dividends  Payable 

Accrued  Accotints  (Payable) 

Funded  Debt 

Deferred  Credits 

Reserves  for  Depreciation 

Reserve  for  Doubtful  Accounts 

Reserve  for  Taxes 

Reserve  for  Sinking  Ftind 

Reserve  for  Contingencies 

Capital  Stock 

Surplus 
Specimen  Complete  Comments 
Specimen  Condensed  Comments 


I 


Chapter  Page 

VII  CERTIFICATES 224 

General  Remarks 
Variety  of  Forms 
Qualifications 

VIII  PRESENTATIONS 232 

Two  General  Practices 
Forms  of  Presentation 
Indexing  of  Parts  of  Report 

IX    MECHANICAL  FEATURES  AND  OFFICE  PROCEDURE 243 

Safeguards  Against  Misuse  of  Reports 
Paper  and  Binding 
Office  Procedure 


II 


8 

PREFACE 

This  book  has  been  written  in  the  interest  of  the  ad- 
vancement of  accounting  practice  with  respect  to  one  of  its  most 
important  features,  which  has  not  heretofore  been  dwelt  upon  at 
length  in  the  literature  of  accountancy,  namely,  the  preparation 
of  reports.   The  vol\ame  is  addressed  to  public  and  private  ac- 
countants and  students  of  accotintancy  with  the  hope  that  it  may 
be  of  service  in  raising  the  standard  of  practice  in  respect  of 
accounting  technique  in  reports  and  the  practical  value  of  the 
reports  to  the  persons  for  whom  they  are  prepared. 

The  work  of  the  accountant,  both  professional  and  pri- 
vate, is  summed  up  in  his  reports.   It  is  also  judged  by  his  re- 
ports.  In  deciding  to  undertake  this  work,  I  was  influenced  to 
no  small  degree  by  the  words  of  a  prominent  business  man  to  the 
effect  that  the  work  of  professional  accountants  which  had  come 
to  his  attention,  as  evidenced  by  their  reports,  was  distinctly 
disappointing.   In  a  large  majority  of  cases  the  client's  im- 
pression of  the  quality  of  professional  accounting  v.'ork  is  de- 
rived entirely  from  the  accountant's  report.   The  field  work 
done  by  the  accountant  or  his  representative  may  be  ever  so  good, 
but  it  will  avail  little  if  the  report  is  not  lucid  and  illumi- 
nating as  well  as  accurate. 

This  also  applies  to  a  large  extent  to  the  reports 
prepared  by  private  accountants  for  the  use  of  executives, 
boards  of  directors,  or  stockholders.   Certain  standards  have 
been  and  are  being  set  by  professional  accountants,  as  the 


9 

leaders  of  thought  in  that  direction,  for  the  presentation  of 
financial  statements  and  their  interpretation;"  arid  business  ex- 
ecutives and  governing  bodies  have  a  right  to  expect  that  the 
persons  charged  with  the  administration  of  their  accounting 
matters  shall  adopt  the  best  practice  in  re^^orting  to  them  upon 
the  financial  condition  and  results  of  operation  of  the  business, 
and  shall  recognize  and  point  out  significant  facts  in  connection 
with  such  statements  which  may  be  utilized  in  correcting  faults 
and  formulating  policies  of  business  administration. 

There  should  be  no  essential  difference  between  the 
practices  of  public  and  private  accountants  with  respect  to  such 
matters  as  nomenclature,  classification,  and  arrangement  in  the 
preparation  of  accovmting  statements.  The  only  difference  is 
that  the  public  accountant  draws  up  his  statements  after  formal- 
ly verifying  the  accuracy  of  the  accounts,  and  the  private  ac- 
countant draws  up  his  statements  from  accounts  assumed  to  be 
accxirate. 

In  view  of  the  foregoing,  it  is  thought  that  this  v;ork, 
which  is  designed  to  exhibit  the  best  practice  of  professional 
accountants  in  the  preparation  of  their  reports,  as  gleansd  from 
the  professional  experience  of  the  author,  will  be  found  equally 
beneficial  in  public  and  private  practice. 

UILLIAM  H.  BELL. 

New  York, 

August  15,  1921. 


I 


« 


10 

CHAPTER  I 
INTRODUCTORY 

GROWING  IMPORTANCE  OF  REPORTS 

With  the  growth  of  modern  business  enterprises  greater 
need  has  arisen  for  developing  adequate  means  by  which  to  keep 
those  responsible  for  the  operation  and  direction  of  the  business 
informed  as  to  its  past  accompliBhments  and  its  present  status. 

Because  of  this  fact,  business  executives  are  recogniz- 
ing more  keenly  than  ever  before  the  essential  part  which  proper- 
ly prepared  reports  play  today  in  the  conduct  of  business.   They 
are  realizing  that  the  present  demands  the  use  of  greater  care 
and  skill  in  the  preparation  of  reports.  This  is  especially  true 
in  the  case  of  reports  rendered  by  accountants,  many  of  whom  are 
apparently  lacking  in  a  proper  appreciation  of  the  necessity  of 
preparing  reports  so  as  to  be  easily  understood  by  those  for  whom 
they  are  intended.   For  it  must  be  remembered  that  a  poorly  con- 
structed report,  though  seemingly  harmless,  is  frequently  a  most 
dangerous  instrument  in  the  hands  of  those  who  use  it. 

Although  existing  works  on  accoxmting  and  auditing  con- 
tain much  discussion  relating  to  the  theory  and  practice  involved 
in  financial  statements,  very  little  has  been  written  on  the 
preparation  of  accoiintants '  reports  from  the  standpoint  of  uni- 
form practice  with  respect  to  form,  arrangement,  and  terminology, 
as  well  as  of  content.   It  is  with  a  desire  to  assist  in  improv- 
ing the  existing  practice  that  this  treatise  has  been  written. 


I 


i 


11 

MORE  LUCID  FINANCIAL  STATEMENTS  DESIRED 

Not  infrequently,  accountants'  reports  are  rendered 
almost  valueless  through  the  inability  of  accountants  to  look  at 
things  through  the  eyes  of  their  clients  and  principals.   It 
should  be  the  aim  of  the  accountant  to  avoid  highly  technical 
terms  and  forms  as  much  as  possible.  The  persons  to  v/hom  reports 
are  addressed  are  not  usually  technical  accoiintants;  but  whether 
they  are  or  are  not,  the  reports  should  be  illximinative  to  anyone 
having  occasion  to  read  tham.   Of  course,  the  accountant  cannot 
hope  to  express  himself  so  that  there  is  absolutely  no  chance  of 
his  reports  being  misunderstood,  but  there  is  a  wide  difference 
between  such  simple  reports  and  the  confusing,  hyper-technical 
statements  circulated  by  some  companies  in  their  printed  reports. 

It  should  be  borne  in  mind  that  as  far  as  the  pro- 
fessional acco\intant  is  concerned  he  has  a  dual  responsibility  - 
to  his  client  and  to  the  public;  and  the  latter  responsibility  is 
not  discharged  by  a  refusal  to  coiontenance  evident  irregularities, 
but  extends  also  to  insistenco  upon  lucidity  in  his  statements. 
The  titles  of  accoxonts  as  they  appear  on  the  books  should  be  ig- 
nored if  they  do  not  clearly  convey  the  desired  meaning.  Such 
titles  are  often  purposely  condensed  and  even,  at  times,  de- 
liberately designed  to  .-nislead. 

NEED  OF  UNIFORM  PROCEDURE 

It  is  also  important  that  accountants,  both  professional 
and  private,  should  endeavor  so  far  as  possible  to  develop  a  uni- 
form procedure  for  presenting  the  financial  facts  of  the  business 


I 


12 


BO  that  rsports  for  different  periods  may  always  be  comparable, 
and  80  that  bankers,  credit-men  and  others  may  have  no  difficulty 
in  contrasting  financial  statements  rendered  by  different  enter- 
prises.  It  is  to  be  remembered  that  the  duties  of  the  two 
classes  of  accountants  differ  only  in  this:  That  the  public  ac- 
countant prepares  his  statements  after  disinterested  examination 
and  proof  or  disproof  of  the  accounts,  while  the  private  ac- 
countant draws  up  his  statements  from  accounts  assumed  to  be  cor- 
rect .  They  should,  therefore,  follow  the  same  procedure  in  pre- 
paring the  statements. 

While  one  of  the  crying  needs  in  accountancy  is  the 
greater  uniformity  of  practice  as  between  the  members  of  the  pro- 
fession, care  should  be  taken  that  the  ganeral  accounting  work 
within  an  organization  is  not  reduced  to  a  purely  routine  basic, 
when  the  substance  is  made  to  fit  the  form  rather  than  the  re- 
verse.  Perhaps  the  greatest  cause  for  criticism  of  rs^.orts  is 
that  they  are  often  stereotyped,  in  both  substance  and  form.   In 
certain  cases  this  fault  is  imaginary,  but  in  others  it  is  very 
real.   It  may  be  due  to  plain  incomi^atsncy  or  to  false  notions 
of  standardization,  which  almost  invariably  result  in  a  narrov/ed 
viev/point  and  restricted  originality.   Of  course,  there  are  very 
many  forms  and  expressions  that  can  hardly  be  improved  and 
nothing  is  therefore  ,2;ained  by  experimentation  with  substitutes. 
The  evil  lias  in  the  lack  of  discrimination  which  results  in 
blindly  applying  such  forr/is  and  expressions  under  conditions 
whore  they  are  inappropriate  or  unnecessary.   Thev  are  not 


13 


hackneyed  if  they  fit  the  case, 

DESIGNATION  OF  STATEMENTS 

A  word  is  necessary  here  concerning  the  designations 
given  to  financial  statements.  The  practice  of  prominent  account- 
ing organizations  differs  with  respect  to  the  use  of  these  desig- 
nations.  It  is  entirely  a  matter  of  personal  preference  whether 
the  principal  statements  be  termed  "exhibits"  or  "schedules, "  or 
whether  they  be  designated  by  letter  or  number.   In  this  ;vork, 
the  term  "exhibit,"  with  a  designating  letter,  is  applied  to  the 
principal  statements,  that  is,  those  which  are,  at  least  to  a 
large  degree,  independent  of  others;  and  the  term  "schedule," 
v/ith  a  designating  number,  is  applied  to  subordinate  statements. 
Sometimes  it  is  necessary  to  render  a  more  detailed  statement 
that  is  itself  subordinate  to  a  "schedule."  For  lack  of  a  more 
suitable  term,  such  tabulations  are  here  called  "statements," 
and  they  are  numbered.  Whatever  scheme  is  adopted,  it  may  have 
to  be  modified  when  reporting  upon  such  matters  as  trust  estates, 
when  court  procedure  calls  for  other  forms  and  designations. 

MECHANICAL  FEATURES  AND  NECESSITY  OF  PRECISION 

In  the  preparation  of  financial  statements,  certain 
mechanical  features  should  not  be  overlooked,  as  they  add  much 
to  the  general  lucidity  and  intelligibility  of  the  statements. 
These  include  such  matters  as  the  typing,  underscoring,  and  in- 
denting of  individxial  items  so  as  to  indicate  the  relationship 
more  clearly.  Neither  should  the  accountant  be  too  niggardly 


I 


IJ 


14 


with  his  comparisons.  The  presentation  of  figures  for  correspond- 
ing periods  of  other  years  greatly  enhances  the  value  of  the 
statements. 

A  prime  essential  to  success  in  accountancy,  as  in  other 
professions  and  arts,  is  precision.   It  is  perhaps  unnecessary  to 
dwell  upon  the  necessity  for  accuracy  of  figures,  but  precision  of 
expression  is  no  less  important.  In  this  connection,  attention 
should  be  given  to  the  misuse  of  such  eaqsressions  as  "paid, " 
"collected,"  "\inearned,  "  "paid  in  advance,"  and  "accrued."  In  the 
use  of  such  expressions  the  standpoint  of  the  business  being  re- 
ported upon  should  always  govern.  Rent  is  paid  in  auivance  by  the 
lessee,  and  collected  in  auivance  by  the  lessor;  insurance  premiums 
are  uneauned  from  the  standpoint  of  the  insurance  company.  The 
only  possible  cure  for  the  tendency  to  lack  of  clarity  in  reports 
is,  as  stated  above,  habitually  seeing  the  reports  with  the  eye  of 
the  client. 

AUDIT  REPORT  DEFINED 

The  reports  specifically  discussed  in  this  book  are, 
naturally,  those  rendered  by  professional  accountants  and  auditors 
to  their  clients.  The  professional  accountants  have  formulated 
certain  standards  with  respect  to  the  form  and  arrangement  of  fin- 
ancial statements,  which  are  applicable  equally  to  public  and  pri- 
vate practice.   It  is  believed  that  through  the  study  of  such  re- 
ports as  are  here  discussed  ample  illustrations  will  be  afforded 
of  the  most  generally  accepted  practice  among  accountants  whether 
engaged  in  public  or  in  private  work. 


I 


16 


It  should  be  noted,  of  course,  that  there  are  certain 
matters  which  have  to  be  considered  by  the  public  acoo\intant  in 
preparing  a  report  for  a  client  with  which  the  accoiintant  engaged 
in  private  work  need  not  concern  himself.  For  example,  there  is 
still  some  confusion  among  accoxintants  in  this  country  as  to  what 
is  meant  by  the  term  "report"  as  applied  to  professional  account- 
ancy practice.   It  is  customary  for  some  to  describe  what  they 
render  to  clients  by  some  such  term  as  "Report  and  Accounts, "  or 
"Report  and  Statements."  They  seem  to  regard  as  the  "report"  the 
part  appearing  over  their  signature,  consisting  of  a  presentation 
and  comment  or  descriptive  matter  —  possibly  also  a  certificate 
but  not  the  statements.  This  practice  originated  in  Great  Bi^itain, 
where  it  is  customary  for  the  professional  auditor  to  certify  to 
statements  submitted  as  those  of  the  client,  but  that  custom  does 
not  prevail  to  any  extent  in  this  country. 

No  acco\intant  would  seriously  contend  that  the  financial 
statements  submitted  by  him  as  part  of  the  results  of  his  work, 
but  not  specifically  over  his  signature,  are  in  any  sense  extrane- 
ous to  his  report.  These  statements  represent  merely  a  convenient 
method  of  exhibiting  the  financial  condition  or  operations  of  a 
business.  The  information  they  contain  might  be  conveyed  as  in-- 
telliglbly  -  possibly  more  intelligibly  in  many  oases  -  in  text 
form,  in  which  case  there  appears  to  be  absolutely  no  doubt  that 
it  would  always  be  held  to  constitute  a  part  of  hia  "report." 
To  illustrate,  the  financial  condition  of  a  business  might  be 
stated  as  follows: 


16 


"The  cash  balance  at  December  31,    1920,   was 
$25,000.00;   the  accounts  receivable  aggregated 
$150,000.00;   and  the   inventories  were  valued  at 
$550,000.00,    making  total  current   assets  of   $725,000.00 
-  con^jared  with  current   liabilities,    consisting  of  ac- 
counts payable   and  accrued  expenses,    of   only  $25,000.00. 
The  capital  assets,    consisting  of  land,    buildings, 
machinery,    and  fixtures   (less  reserves  for  deprecia- 
tion),   amoxinted  to  $265,000.00.     There  v/ere  deferred 
charges  to  operations    (interest  and  insurance  paid  in 
advance)   amounting  to  $10,000.00.     The  net  worth  of 
the  business  was  $750,000.00,    represented  by  capital 
stock  of  $500,000.00  and  surplus  of  $250,000.00." 

In  this  book  the  word  "report"  when  referring  to  a  pro- 
fessional audit   is  intended  to  comprehend  everything  formally 
submitted  to  the  client. 

CHARACTER  AND  SCOPE  OF  REPORT 

A  matter  of  prime  Importance  for  the  acooiontant    is  the 
necessity  for  determining  clearly   in  advance  the   character,    scope, 
and  pvirpose  of  the  report  which  is  desired.      This  necessity  of 
careful  analysis  of  the  requirements  of  a  situation  finds,    of 
course,    most    striking  illustration  in  the  work  of  a  public  ac- 
countant  for  a  client.     The  composition  of  the  report  as  to 
statements  and  statistical  data  should  be  determined  with  reason- 
able definiteness  before  the  work  has  proceeded  far.      In  this 
connection,    as  much  consideration  as  possible   should  be  given  to 
the  client's  interests   in  the  matter  of  expense,    and  statements 
or  other  matter   should  not  be  prepared  xinnecessarily. 

For  example,    unless  a  permanent   and  complete  record  of 
the  details  of  the  accounts  receivable  and  payable   is  desired 
for  the  report,    the  accountant   may   check  the  client's  trial  bal- 


17. 


anoes,  and  thus  obviate  the  necessity  for  preparing  schedules  of 
his  ovm  or  amplifying  such  schedules  as  may  be  furnished  by  the 
client.  Similarly,  if  the  details  of  securities  owned,  notes  re- 
ceivable, etc.,  are  not  to  be  included  in  the  report,  the  public 
accountant  may  be  able  to  utilize  as  working  papers  copies  of 
the  client's  schedules,  which  may  frequently  be  obtained.   So 
also  in  the  verification  of  property  accounts  and  others  of  like 
nature,  if  details  of  changes  are  not  to  be  shown  in  the  report, 
small  items  may  usually  be  assumed  to  be  correct  without  investi- 
gation and  the  larger  ones  need  not  be  quite  so  specifically 
described  in  the  working  papers  as  would  otherwise  be  the  case. 

In  rare  cases  the  contents  of  a  public  accountant's 
report  as  to  statements  and  text  matter  is  prescribed  by  the 
client.  Usually,  however,  it  devolves  upon  the  public  accotint- 
ant  to  anticipate  the  desires  of  his  client  in  this  respect, 
furnishing  all  data  which,  in  his  opinion,  the  client  will  re- 
quire or  appreciate. 

The  accountant  may  have  been  engaged  to  examine 
specific  accounts  or  the  records  of  certain  specific  transac- 
tions, in  which  case  a  simple  letter  will  usually  prove  ade- 
quatej  to  audit  the  cash  receipts  and  disbursements  for  a  cer- 
tain period,  when  a  statement  of  cash  transactions  -will  usually 
be  required;  to  audit  the  asset  and  the  liability  accounts  as 
of  a  certain  date  (usually  termed  a  balance  sheet  audit),  when 
a  balance  sheet  will  almost  always  be  rendered;  or  to  nake  a 
complete  audit  for  a  certain  period,  when  a  full  report  is  re- 


18 


quired  -  usually  consisting  of  a  balance  sheet  at  the  end  of  the 
period  and  a  statement  of  income  and  profit  and  loss  for  the 
period,  with  or  without  comments.  On  each  of  these  a  formal  cer- 
tificate may  also  be  called  for. 

PARTS  OF  REPORT 

Still  another  matter  which  specifically  affects  the  ac- 
countant in  public  practice  preparing  reports  for  clients  is  that 
of  the  component  parts  of  the  report  and  the  order  in  which  they 
should  appear.  The  private  acco\intant  usually  submits  to  his 
principals  only  financial  statements.   If  he  has  any  comments  to 
make  he  renders  them  orally.  The  professional  accountant,  on  the 
other  hand,  upon  concluding  his  audit  submits  to  his  client  a 
formal  report  in  writing,  in  which  he  includes,  in  addition  to 
the  statements,  comments  on  the  several  items  of  the  statements 
as  suggested  above,  or  on  other  more  general  matters,  such  as  the 
system  of  accounting  used.  These  are  a  most  important  part  of 
his  report,  and  should  be  prepared  with  the  greatest  care. 

In  suidition  to  the  financial  statements  and  comments 
an  audit  report  contains  two  other  features  which  are  not  used 
in  the  reports  rendered  by  the  private  accountant,  namely,  the 
certificate  and  the  presentation.  The  certificate  of  audit 
should  state  briefly  but  specifically  the  extent  of  its  applica- 
tion. Special  care  should  be  taken  when  it  is  necessary  to  make 
qualifications.   In  the  presentation,  which  forms  the  introduc- 
tory part  of  the  report,  the  client  should  be  formally  advised 
of  what  has  been  done  and  the  contents  of  the  report. 


19 

The  order  in  which  the  several  parts  of  the  audit  re- 
port are  considered  in  this  book  is  the  order  in  which  they  are 
completed  by  the  acooiintant,  namely,  statements,  comments,  certi- 
ficate, ajid  presentation.   In  the  report  itself  the  parts  are 
arranged  differently,  the  following  being  probably  the  best  order 
in  the  majority  of  cases:   presentation,  comments,  certificate 
(assuming  it  is  separate  and  not  appended  to  a  statement),  and 
statements. 


20 


CHAPTER  II 
BALANCE  SHEETS 

The  work  of  the  accoxintant,  whether  private  or  pro- 
fessional, has  tv/o  more  or  less  distinct  aspects.  The  first  is 
the  keeping  or  investigation  of  accounts  -  the  process  of  record- 
ing transactions  from  day  to  day  or  of  verifying  the  records 
periodically.  The  second  is  concerned  with  the  siimmarization,  in 
a  form  readily  intelligible,  of  the  daily  records  or  of  the  re- 
sults of  an  investigation  of  the  records  -  the  preparation  of 
financial  statements. 

The  vast  expansion  and  increased  complexity  of  the  busi- 
ness unit  has  demanded  of  the  accoxintant  improved  and  simplified 
methods  of  routine  accounting.  But  it  has  also  compelled  him  to 
give  more  study  to  the  method  of  formulating  financial  statements. 
The  men  at  the  helm  of  great  aggregations  of  capital  cannot  main- 
tain personal  contact  with  the  organizations  in  all  their  mani- 
fold ramifications.  They  are,  therefore,  in  special  need  of  a 
compass  that  will  enable  them  to  steer  a  proper  course.  This  is 
provided  by  financial  statements  epitomizing  the  condition  and 
operation  of  their  companies.  Too  much  attention,  therefore, 
cannot  be  given  to  the  proper  formulation  of  financial  reports 
and  the  general  effectiveness  and  lucidity  with  which  the  vital 
facts  concerning  an  industry  are  presented  to  those  in  control. 

The  purpose  of  fhe  first  part  of  the  present  work  is 
to  set  forth  the  most  approved  methods  of  drawing  up  the  state- 
ments, beginning  with  the  balance  sheet.   In  later  chapters  con- 


21 

sidoration  la  given  to  questions  in  which  the  public  accovmtant 
is  particularly  interested,  the  general  preparation  and  arrange- 
ment of  an  audit  report. 

It  seems  to  be  quite  customary  among  American  account- 
ants to  use  the  term  "General  Balance  Sheet"  as  a  formal  title 
to  most  statements  of  assets  and  liabilities,  but  in  conversation 
the  same  accountants  drop  the  prefix  "general."   In  a  search  of 
accounting  literatiire  regarding  the  origin  and  evolution  of  the 
balance  sheet,  the  only  instance  of  the  use  of  the  word  "general" 
in  this  connection  which  has  been  discovered  by  the  author  is  in 
relation  to  the  "double  account  form  of  balance  sheet,"  which  is 
prescribed  by  law  for  certain  English  companies.  This  consists 
of  two  sections:   the  first,  "Receipts  and  Expenditures  on  Capi- 
tal Account";  the  second,  the  "General  Balance  Sheet,"  to  which 
is  brought  down,  as  an  asset  or  a  liability,  the  balance  from 
the  first  section. 

As  a  practical  matter,  the  word  "general"  appears  to 
be  redundant.  Virtually  all  balance  sheets  are  "general,"  in 
the  sense  that  they  exhibit  the  condition  of  the  business  at  a 
given  time  in  toto.  The  term  balance  sheet  is  commonly  under- 
stood as  having  that  meaning,  and  in  the  comparatively  rare 
cases  when  it  is  ai;plied  to  a  statement  of  the  condition  of  a 
branch  or  department,  the  balancing  account  of  which  is  with 
the  main  office,  it  is  used  for  lack  of  a  better  term.  Rarely, 
if  ever,  is  a  distinction  made  between  "general  balance  sheets" 
and  "balance  sheets"  in  respect  to  the  degree  of  detail  pre- 
sented. 


22 

There  are  two  general  practices  regarding  the  arrange- 
ment of  items  in  the  preparation  of  balance  sheets,  namely: 

1.  The  arrangement  of  assets  as  nearly  as  practicable 

in  the  order  of  their  availability,  and  liabili- 
ties in  the  order  in  which  they  are  payable, 
with  the  accounts  representing  net  v;orth  (capi- 
tal, or  capital  stock  and  surplus)  last. 

2.  Beginning  w^th  the  permanent  or  fixed  assets, 

opposite  which  are  shown  the  soxirces  of  capital 
(usually  capital  stock  and  funded  debt)  the 
order  of  the  other  assets  and  liabilities  being 
very  much  as  in  the  first  arrangement,  with  the 
surplus  the  last  item  among  the  liabilities. 

Each  of  these  methods  has  its  advantages,  but  it  is 
perhaps  safe  to  assert  that  in  the  majority  of  cases  the  former 
is  preferable.   It  is  almost  always  used  in  the  case  of  finan- 
cial Institutions.   If  the  balance  sheet  is  primarily  intended 
to  be  submitted  to  a  prospective  lender,  prominence  should  be 
given  to  the  comparison  of  current  assets  with  cxirrent  liabili- 
ties by  placing  them  at  the  top.   If  the  balance  sheet  is  in- 
tended for  a  prospective  purchaser,  the  net  worth  of  the  busi- 
ness may  well  be  stated  in  one  amount,  thereby  conforming  to 
the  first  arrangement.   In  the  opinion  of  many  aocountajits,  the 
growing  practice  of  issuing  capital  stock  without  par  value 
furnishes  an  additional  reason  for  showing  in  the  balance  sheet 
the  total  of  the  capital  stock  and  surplus. 

It  is  argued  by  some  accountants  that  the  second 
method  is  preferable  for  the  reason  that  it  is  more  logical  to 
present  first  the  capital  assets,  with  which  the  business  is 
carried  on,  in  juxtaposition  to  the  sources  of  capital.  The 
only  objection  to  the  method  is  that  the  surplus  of  a  corpora- 


23 


tion,  which  is  almost  invariably  stated  last,  is  very  often  to  a 
large  extent  also  invested  in  the  capital  assets.  However,  the 
method  is  well  established  in  practice,  especially  in  drawing  up 
balance  sheets  of  railroad  and  public  utility  corporations. 

The  first  method  is  exemplified  in  summary  form  as  fol- 
lows, taking  as  an  example  the  balance  sheet  of  a  manufacturing 
corporation: 


Assets 

Current  Assets 
Investments 
Sinking  Fund 
Property 

Good-Uill,  Patents, 
Trade-Marks,  etc. 
Deferred  Charges 


Liabilities 

Current  Liabilities 
Funded  Debt 
Deferred  Credits 
Reserves 
Capital  Stock 
Surplus 


The  alternative  arrangement  most  generally  employed  is 
shown  as  follows: 


Assets 

Property 

Good-VTill,  Patents, 
Trade-LIarks,  etc. 
Sinking  Fund 
Investment  Securities 
Current  Assets 
Deferred  Charges 


Liabilities 

Capital  Stock 
Funded  Debt 
Current  Liabilities 
Deferred  Credits 
Reserves 
Surplus 


Following  is  a  condensation  of  the  form  of  balance 
sheet  proposed  by  the  Federal  Reserve  Board  for  merchants  and 
manufacturers: 


24 

ASSETS 


Cash 


Notes  and  Accounts  Receivable 

(including  notes  receivable  discounted  or  sold  with  indorse- 
ment or  guaranty;  and  showing  separately  those  past  due) 
Less  provisions  for  Bad  Debts,  Discoxmts,  Freights,  Allow- 
ances, etc. 

Inventories: 

Raw  Material 
Goods  in  Process 
Uncompleted  Contracts 

Less  Collections  on  Account 
Finished  Goods 

Other  Ouick  Assets: 
(fully  described) 

Total  Quick  Assets: 

(excluding  all  investments) 

Securities  Readily  Marketable  and  Salable 
Without  Impairing  the  Business 

Notes  Given  by  Officers,  Stockholders,  or 
Employees 

Accounts  Due  from  Officers,  Stockholders,  or 
Employees 

Total  Ciirrent  Assets 

Fixed  Assets: 

Land  Used  for  Plant 
Buildings  Used  for  Plant 
Machinery 

Tools  and  Plant  Equipment 
Patterns  and  Drawings 
Office  F\irnitxire  and  Fixtures 
Other  Fixed  Assets,  if  any 
(fully  described) 

Total 
Less  risserves  for  Depreciation 

Total  Fixed  Assets 


25 


Deferred  Charges: 

Prepaid  Expenses,  Interest,  Insxirance, 
Taxes,  etc. 

Other  Assets: 

(fully  described) 

TOTAL  ASSETS 


LIABILITIES 

Bills,  Notes,  and  Accounts  Payable: 
Unsecured  Bills  and  Notes: 

On  Account  of  Purchases  of  Merchandise,  Plant  Assets,  etc, 

On  Acco\int  of  Loans 
Unsecured  Accounts: 

For  Purchases 

Due  to  Stockholders,  Officers,  or  Employees 
Secured  Liabilities: 

Notes  Receivable  Discounted  or  Sold  with 
Indorsement  or  Guaranty  (per  contra) 

Customers'  Accounts  Discounted  or  Assigned 

Obligations  Secured  by  Liens  or  Inventories 

Obligations  Secured  by  Securities  Deposited  as  Collateral 

Accrued  Liabilities  (interest,  taxes,  wages,  etc.) 


Other  C\irrent  Liabilities: 
(fully  described) 


Total  Current  Liabilities 


Fixed  Liabilities: 

Mortgage  on  Plant  (due  date) 
Mortgage  on  Other  Real  Estate 
Chattel  Mortgage  on  Machinery 
Bonded  Debt  Tdue  date) 
Other  Fixed  Liabilities: 
(fully  described) 


(due  date) 
or  Equipment 


(due  date) 


Total  Fixed  Liabilities 

TOTAL  LIABILITIES 


I 


26 


NET  WORTH: 

If  a  Corporation: 

Preferred  Stock  (less  stock  in  Treasury) 
Common  Stock  (less  stock  in  Treasxiry) 
S\irplu8  and  Undivided  Profits 

Total 

Less: 

Bouk  Value  of  Good-Will 
Deficit 

Total 

If  an  Individ\aal  or  Partnership: 
Capital 
Undistributed  Profits  or  Deficit 

Total 


There  is  considerable  variance  in  the  practices  of 
accountants  with  respect  to  the  captions  in  balance  sheets  -  as 
in  every  other  phase  of  accounting  practice. 

The  terms  Liquid  Assets  and  Quick  Assets  are  frequent- 
ly used  synonymously  with  Current  Assets,  although  it  appears 
that  Quick  Assets  should  be  more  restricted,  as  in  the  forego- 
ing illustration.  The  author  prefers  the  term  Current  Assets, 
to  include  cash  and  other  items  that  will  normally  be  converted 
into  cash,  such  as  receivables,  inventories,  and  temporary  in- 
vestments in  securities  (at  market  value). 

The  terms  Fixed  Assets  and  Capital  Assets  are  used 
interchangeably,  to  denote  plant  assets,  investments  in  sub- 
sidiary companies,  and  patents,  good-will,  trade-marks,  fran- 
chises, etc. 

Most  acooomtants  usiially  treat  inventories  as  Current 
Assets,  but  some  treat  them  as  Working  Assets  or  Working  and 


i 


i 


27 

Trading  Assets.   This  latter  class  is  often  also  made  to  include 
expenditxires  applicable  to  future  operations  (insurance,  taxes, 
interest,  etc.)  which  are  treated  by  most  accotintants  as  Deferred 
Charges  or  Deferred  Debit  Items.  Expense  funds  and  inventories 
of  supplies  (as  distinguished  from  materials)  are  variously 
classed  as  Current  Assets,  Working  Assets,  and  Deferred  Charges. 

Some  accountants  are  so  concerned  over  the  distinction 
between  "liabilities"  and  "accountabilities"  that  they  fsel  im- 
pelled to  use  the  heading  "Liabilities  and  Capital."  The  use  of 
the  word  "liabilities,"  as  comprehending  the  proprietorship  ac- 
counts, has  been  sanctioned  by  custom.  Furthermore,  there  is 
some  question  as  to  whether  the  capital  originally  contributed 
by  the  proprietors,  together  with  any  accretions,  may  not  be  re- 
garded, in  a  broad  sense,  as  a  liability  of  the  business.   Let 
those  who  are  disposed  to  indulge  in  hair-splitting  arguments 
on  the  subject  do  so;  the  author  is  not  convinced  of  the  desir- 
ability of  departing  from  well  established  practice  in  this 
respect. 

Custom  has  also  sanctioned  the  placing  of  a  deficit 
among  the  assets.  There  seems  to  be  no  objection  to  doing  so 
in  most  cases,  as  it  is  certainly  not  going  to  be  overlooked, 
and  the  figure  of  total  assets  is  not  particularly  important. 

Most  accountants  include  accrued  liabilities  such  as 
taxes,  interest,  and  wages,  in  Current  Liabilities,  but  others 
make  a  separate  group.  Accrued  Liabilities.  Certain  accruals, 
notably  Federal  taxes  and  commissions,  are  often  shown  as  ra- 


11 


28 

serves.   It  is  a  fairly  well  established  principle  that  any 
provision  for  an  expense  that  will  have  to  be  met>  even  though 
the  exact  sunoimt  may  not  be  determined,  is  a  liability  as  dis- 
tinguished from  a  reserve,  but  it  requires  no  little  temerity 
for  an  accountant  to  insist  upon  showing  as  one  of  the  current, 
or  even  accrued,  liabilities,  for  example,  a  provision  for 
Federal  taxes,  when  payment  of  a  large  part,  if  not  all,  is  con- 
siderably deferred. 

Practices  also  differ  with  respect  to  the  location  in 
the  balance  sheet  of  reserves  for  depreciation,  doubtful  ac- 
counts, etc.   Such  reserves  are  sometimes  shown  under  the  head 
of  liabilities  and  sometimes  deducted  (usually  on  the  face  of 
the  balance  sheet)  from  the  asset  items  to  which  they  relate. 
It  seems  that  no  invariable  rule  can  be  adopted,  but  it  is 
generally  preferable  to  deduct  these  reserves  from  the  related 
assets.   In  the  last  analysis,  there  are  but  three  classes  of 
accounts  shoi-vn  in  the  balance  sheet,  viz.,  assets,  liabilities, 
and  proprietorship.  To  the  extent  that  such  reserves  repre- 
sent provision  for  decline  in  value  of  assets  (actual  or  esti- 
mated) they  are  neither  liabilities  nor  proprietorship,  and 
are,  therefore,  deductions  from  assets.  This  excludes  provi- 
sion for  obsolescence,  etc.,  which  may,  if  desired  and  if  prac- 
ticable, be  segregated. 

In  the  preparation  of  the  balance  sheet  it  should  be 
the  aim  to  express  each  item  clearly,  if  necessary  ignoring 
the  names  of  accounts  as  they  appear  on  the  books.   In  other 


I 


29 

words,  the  balance  sheet  should  be  a  terse  story  about  the  fin- 
ancial condition  of  the  business,  not  a  mere  trial  balance  after 
closing. 

In  the  following  pages  will  be  shown  and  discussed  in 
more  or  less  detail  the  items  which  it  is  thought  are  generally 
included  under  the  several  groups  of  assets  and  liabilities  mak- 
ing up  the  balance  sheet,  arranged  in  the  order  regarded  by  the 
author  as  the  most  satisfactory  in  the  majority  of  cases. 

CURRENT  ASSETS 

The  items  under  this  caption  v^ill  be  assumed  to  be  as 

follows: 

Cash 

Cash  on  Deposit  for  Payment  of  Interest,  etc. 

Working  Funds 

Notes  and  Acceptances  Receivable 

Accounts  Receivable; 

Customers 

Employees  -  on  Liberty  Loan  Bond  Subscrip- 
tions 

Others 
Temporary  Investments 
Accrued  Interest  Receivable 
Inventories: 

Finished  Goods 

Work  in  Process 

Materials  and  Supplies 
Advances  on  Materials  Piir chased 

Cash.   The  general  cash  balance  may  be  shown  in  one 
item,  as  above,  or  if  the  amount  of  cash  on  hand  is  consider- 
able it  may  be  shown  separately,  as  "Cash  on  Deposit"  and  "Cash 
on  Hand."   In  orisr  to  distinguish  more  clearly  the  general 
cash  balance  from  deposits  for  special  purposes,  the  former  may 


I 

4 


30 


be  designated  as  "Cash  -  Current  Fxinds"  or  "Cash  on  Deposit  - 
General  Funds . " 

A  bank  overdraft  should  be  shown  among  the  current 
liabilities.  However,  if  there  should  be  an  overdraft  on  one 
bank,  represented  by  outstanding  checks,  which  is  more  than  off- 
set by  an  available  balance  in  another  bank,  there  seams  to  be 
no  objection,  in  a  balance  sheet  of  a  going  concern,  to  showing 
the  net  balance  as  an  asset.   If  there  is  a  net  overdraft,  con- 
sisting of  an  overdraft  on  one  bank  and  a  debit  balance  of  small- 
er aino\int  in  another,  the  two  items  should  be  shown  in  the  bal- 
ance sheet  as  a  liability  and  an  asset  respectively.   It  is  some- 
times found  that  overdrafts  shown  on  the  books  are  caused  by 
entering  checks  considerably  in  advance  of  their  being  sent  out. 
If  practicable,  the  amoxonts  of  such  checks  in  the  office  at  the 
date  of  the  balance  sheet  should  be  ascertained  and  the  cash  bal- 
ance and  accounts  payable  increased  accordingly. 

The  "Cash  on  Deposit  for  Payment  of  Interest,  etc," 
would  include  deposits  for  payment  of  coupons,  dividends,  ma- 
tured funded  debt,  etc.,  the  liabilities  for  which  are  included 
under  ciirrent  liabilities.  Such  deposits  as  for  sinking  funds, 
proceeds  of  sales  of  mortgaged  property,  gas  and  electric  ser- 
vice, etc.,  should  be  shown  separately,  not  xinder  current  assets. 

Working  Funds.  By  this  term  is  meant  cash  fxonds  in  the 
hands  of  cashiers,  salesmen,  or  others,  for  payment  of  ciirrent  ex- 
penses or  for  making  purchases.   Some  acco\mtants  classify  such 
funds  as  Deferred  Charges,  but  as  they  are  practically  as  current 


61 


as  the  general  cash,  provided  expenditures  have  been  properly 
cleared,  there  seems  to  be  no  good  reason  for  excluding  them 
from  cxirrent  assets;  in  fact  there  should  be  no  objection  to 
combining  them  with  the  general  funds,  in  the  item  "Cash." 

The  various  fiinds  may  be  shown  separately  or  in  total, 
depending  upon  circxjunstances. 

Notes  and  Acceptances  Receivable.   It  is  generally 

satisfactory  to  combine  notes  and  trade  acceptances  receivable, 

as  there  is  no  essential  difference  between  them.  However,  if 

any  considerable  ajnoxint  of  notes  represents  other  than  trade 

obligations  such  notes  should  be  shown  separately,  in  which 

case  the  items  would  appear  somewhat  as  follows: 

Notes  and  Acceptances  Receivable  -  Trade 
Notes  Receivable  -  Loans 

or  they  might  be  shown  as  three  items,  thus: 

Trade  Acceptances  Receivable 
Trade  Notes  Receivable 
Other  Notes  Receivable 

The  amount  of  contingent  liabilities  on  accoiont  of 

endorsement  of  notes  and  accepto^nces  may  be  iisclosed  under 

this  heading  by  showing  the  total  amovmt  less  the  amount  dis- 

co\inted,  thus: 

Notes  and  Acceptances  Receiv- 
able   $100,000.00 

Less  Discounted 75.000.00  $25,000.00 

However,  the  usual  methods  of  showing  such  contingent  liabili- 
ties are  by  means  of  footnotes  or  separate  items  on  the  balance 
sheet,  as  explained  later. 


32 


Accounts  Receivable.   In  the  balance  sheet  of  a  com- 
mercial business  it  is  usually  desirable  to  show  the  trade  ac- 
counts receivable  separate  from  accounts  representing  loans  or 
advances  to  individuals,  or  other  accounts  which  are  presxxmably 
not  as  current  as  customers'  accounts.   If  all  the  accounts  re- 
ceivable are  with  customers  it  is  wipll  to  designate  the  balance 
sheet  item  accordingly,  thus:   "Accounts  Receivable  -  Customers." 
It  is  almost  always  desirable  to  anticipate  the  inevitable  in- 
quiry of  a  reader  of  the  balance  sheet  as  to  the  character  of 
the  accounts  receivable  by  positive  designation  of  the  trade 
accounts. 

The  extent  to  v«rhich  the  accounts  other  than  with 
customers  are  itemized  depends  upon  the  amoxints  thereof  and 
other  conditions.   If  the  amounts  of  the  accounts  with  officers 
and  employees  are  considerable,  they  are  usually  shown  separate- 
ly. Any  comparatively  large  amount  of  claims  against  transpor- 
tation companies  will  also  be  shown  as  a  separate  item.  How- 
ever, if  the  total  of  the  accoimts  other  than  customers'  ac- 
counts is  not  large  it  may  well  be  shown  in  one  item  -  "Others." 
The  guiding  principle  should  be  to  furnish  an  interested  person 
with  sufficient  information  to  enable  him  to  form  an  opinion 
regarding  the  collectibility  and  liquidity  of  the  accounts. 

Credit  balances  in  customers'  acco;«its,  not  offset 
by  debit  balances  with  the  saune  customers,  are  usually  included 
among  the  liabilities,  either  as  a  separate  item  or  added  to 
the  accounts  payable.  Likewise,  debit  balances  in  creditors' 


33 


accounts,  unless  they  represent  advance  payments  for  merchandise 
or  services,  or  are  offset  by  credit  balances  ;vith  the  same 
creditors,  should  be  classified  as  accounts  receivable,  either 
being  shown  as  a  separate  item  or  included  in  "Others."   If  the 
debit  balances  in  creditors'  accounts  actually  reijr3S3nt  advance 
payments  (which  should  not  be  assvimed)  they  should  be  shown 
under  C\irrent  Assets,  as  "Advances  on  Materials  Purchased,"  or 
under  Deferred  Charges  with  appropriate  explanation. 

It  is  usually  desirable  to  show  3epar:^tely  accounts 
with  affiliated  companies.   If  such  accounts  represent  advances 
of  a  permanent  character,  they  should  be  carried  under  the  head 
of  Investments. 

Many  concerns  assign  their  trade  accounts  receivable 
in  consideration  of  advances  made  to  them.   For  the  better  se- 
curity of  the  lender,  these  transactions  usually  take  the  legal 
form  of  actual  sales  of  the  accounts,  with  or  without  notifica- 
tion to  the  customers,  but  for  practical  purposes  they  are 
loans  secured  by  the  accounts  and  amomiting  to  about  eighty  par 
cent  of  their  value.   Remittances  by  customers  are  usually  made 
in  the  regular  ivay  and  the  entire  amounts  turned  over  to  the 
lender.   Accepting  the  theory  that  the  accoxonts  are  pledged 
rather  than  sold,  it  seems  logical  to  carry  them  as  assets  at 
their  fece  value  and  the  balance  due  the  lander  as  a  liability. 
This  balance  will  consist  of  the  original  advances  on  unsettled 
accounts  less  the  margin  of,  say,  twenty  per  cant  not  yet  re- 
funded by  the  lender  on  accounts  which  have  been  settled.   Unaer 


34 

this  treatment  the  customers'  accovmts  will  be  shown  on  the  bal- 
ance sheet  as  follows: 

Acooiints  Receivable  -  Customers: 
Pledged 
Unpledged 

The  alternative  procedure,  which  in  the  opinion  of  the 
author  is  illogical,  is  to  show  as  assets  the  equity  in  the 
assigned  accounts  and  the  refund  due  on  settled  accounts.  How- 
ever, this  method  will  be  found  useful  in  the  preparation  of  cer- 
tain condensed  financial  statements  in  which  it  is  desired  to 
set  forth  the  net  assets  of  each  class.   Such  statements  will  be 
discussed  later. 

Practices  differ  with  respect  to  the  treatment  in  the 
balance  sheet  of  reserves  for  doubtful  accoxints,  discounts,  etc. 
Some  accovintants  deduct  them  from  the  assets,  while  others  show 
them  among  the  liabilities.   In  the  opinion  of  the  author,  re- 
serves against  specific  accounts  regarded  as  uncollectible  or 
doubtful  should  always  be  deducted;  but  if  all  such  accounts 
have  been  written  off  and  the  reserve  represents  general  pro- 
vision for  such  loss  as  may  be  sustained  in  the  future,  there 
seems  to  be  no  valid  objection  to  carrying  the  accounts  at 
their  face  value  and  showing  the  reserve  among  the  liabilities, 
upon  the  theory  that  it  is  virttially  a  reserve  for  contingencies. 
That  theory  has  act\iated  the  Treasury  Department  to  disallow 
deduction,  as  such,  of  amounts  reserved  for  expected  losses.   If 
it  is  a  settled  policy  to  show  reserves  for  uncollectible  ac- 
counts among  the  liabilities,  any  considerable  amo\int  of  doubt- 


35 


ful  accounts  covered  by  a  reserve  should  be  separated  from  the 
current  accounts  and  included  in  the  deferred  charges.  With  re- 
gard to  reserves  for  trade  discounts,  quantity  discounts,  allow- 
ances, freight,  etc.,  there  seems  to  be  little  doubt  that  they 
are  properly  deductible  from  the  assets.  The  author  does  not 
advocate  setting  up  a  reserve  for  cash  discounts  to  be  allowed 
to  customers  on  outstanding  accounts,  believing  that  such  dis- 
counts become  a  charge  when  taken  and  not  when  the  sales  are 
made . 

The  method  of  treating  employees'  subscriptions  for 
government  securities  is  not  as  live  an  issue  as  it  has  been, 
but  undoubtedly  some  such  balances  will  be  carried  for  a  con- 
siderable time,  and  it  may  therefore  not  be  amiss  to  devote 
some  attention  to  the  subject.   Generally  speaking,  employers 
who  have  purchased  Liberty  Loan  bonds  and  Victory  Loan  notes 
for  employees  have  also  purchased  some  for  their  own  account; 
and  in  perhaps  most  cases  the  employers  do  not  insist  upon 
the  employees  completing  their  payments  if  they  desire  to  be 
released.   In  view  of  these  conditions  it  has  become  quite  a 
general  practice  to  carry  all  these  securities  purchased  in 
one  account,  that  is,  to  treat  them  all  as  owned  by  the  em- 
ployer; to  credit  receipts  from  employees  to  a  liability  ac- 
count; and  when  an  employee  completes  payment  to  credit  the 
former  and  charge  the  latter  accoimt .   In  the  opinion  of  the 
author  it  is  preferable  to  carry  separate  accounts  for  the 
cost  of  the  securities,  charging  the  employees  with  the  cost 


i! 


36 

of  bonds  subscribed  for  by  them,  upon  the  theory  that  the  em- 
ployees actually  own  the  bonds  and  the  employer  has  merely  ad- 
vanced the  purchase  price  and  is  holding  the  bonds  as  security; 
the  receipts  from  employees  to  be  credited  to  their  accounts 
and  any  necessary  adjustments  to  be  made  later.  The  aggregate 
of  the  balances  of  these  accounts  would  then  be  shown  on  the 
balance  sheet  as  Due  from  Employees  on  Liberty  Bond  Subscrip- 
tions. 

In  this  connection  consideration  may  be  given  to  the 
treatment  of  obligations  of  the  business  arising  from  the  pux- 
chase  of  government  bonds  or  notes.   During  the  period  of  war 
financing  there  appeared  to  be  some  question  as  to  whether  the 
total  amount  of  bonds  subscribed  for  should  be  shown  as  an 
asset,  the  unpaid  instalments  or  loans  being  shown  as  a  liabili- 
ty, or  merely  the  equity  be  shown  as  an  asset,  with  or  without 
details.   Inasmuch  as  banks  have  always  regarded  the  bonds  as 
the  property  of  the  borrowers  and  not  as  sold  on  the  instal- 
ment plan,  it  appears  that  both  the  asset  and  the  liability 
should  always  have  been  shown,  although  the  latter  may  have 
been  differentiated  from  other  notes  payable.  Moreover,  any 
conditions  prevailing  during  the  war  financing  which  may  have 
seemed  to  warrant  unusual  treatment  of  notes  payable  secured 
by  Liberty  Loan  bonds  and  notes,  certainly  do  not  prevail  now. 

Temporary  Investments.  Whether  or  not  securities 
may  properly  be  classified  as  current  assets  depends  primarily 
upon  the  purpose  of  holding  them,  and  secondarily  upon  their 


37 


marketability.   If  the  securities  can  be  disposed  of  readily, 
and  without  changing  the  company's  policy  with  respect  to  its 
investments  or  affecting  its  business  relations,  they  may  be 
considered  current  assets.   If,  on  the  other  hand,  they  are  re- 
garded as  more  or  less  permanent  investments,  or  represent  pro- 
prietary or  controlling  interests,  they  should  be  treated  as 
permanent  investments,  even  though  marketable  at  will.   The 
maturity  of  the  securities  may  not  necessarily  be  a  criterion; 
a  company  may  invest  some  part  of  its  permanent  reserve  funds 
in  short-term  notes  on  account  of  their  higher  interest  rate. 

The  book  value  of  securities  carried  as  current 
assets  should  not  be  materially  in  excess  of  market  value.   If 
any  of  the  securities  are  pledged  that  fact  should  be  indicat- 
ed on  the  balance  sheet . 

There  will  usually  not  be  many  items  of  temporary 
investments,  and  it  is  preferable,  if  practicable,  to  carry 
them  in  the  balance  sheet  by  name  instead  of  as  a  group. 

Accrued  Interest  Receivable.   This  may  be  shown  in 
one  amoiint  or  itemized  as,  for  example,  on  notes  receivable 
and  on  bonds  owned. 

Inven-uries.   As  much  detail  regarding  inventories 
may  be  shown  in  the  balance  sheet  as  the  circumstances  seem 
to  call  for.   It  is  usually  desirable  to  classify  the  inven- 
tories of  a  manufacturing  business  in  the  general  groups  of 
finished  goods,  work  in  process,  and  mati^rials  and  supplies. 


4 


38 


Some  accountants  olaesify  supplias  which  are  not  ac- 
tually ingredients  of  the  product  -  fuel,  repair  parts,  sta- 
tionery, etc.,  -  as  Deferred  Charges,  along  with  other  prepaid 
expenses,  but  the  author  makes  a  distinction  between  physical 
or  tangible  items  and  intangible  items,  including  the  former  in 
Inventories,  under  Current  Assets. 

If  any  of  the  merchandise  is  pledged,  that  fact  should 
be  indicated  on  the  balance  sheet,  either  in  the  item  itself  or 
in  a  footnote. 

In  an  audit  report  it  is  frequently  desirable  to  quali- 
fy the  balance  sheet  with  respect  to  responsibility  for  physical 
inventories  as  to  quantities  or  prices,  or  both.  This  can  be 
done  effectually  by  stating  the  caption  in  one  of  these  ways: 

Inventories  as  Taken  by  the  Company 
Inventories  as  Taken  and  Valued  by  the  Company 
Inventories  (not  verified) 

If  physical  inventories  have  not  been  taken  and  the 
book  inventories  are  not  accepted  without  qualification,  the 
item  may  be  shown  thus:   Inventories  -  Book  Value. 

Any  reserve  against  decline  in  value  of  inventories 
or  for  interdepartmental  profit  on  goods  on  hand,  should  usual- 
ly be  deducted  from  the  amo\int  of  the  inventory.  The  deduction 
of  a  reserve  representing  a  conservative  provision,  not  actually 
required,  is  usxoally  shown  on  the  face  of  the  balance  sheet. 

In  certain  seasonal  businesses,  such  as  the  dry  goods 
business,  it  is  quite  customary,  in  closing  the  books  at  the 
end  of  a  season,  to  exclude  from  the  accoiints  purchases  and 


39 

expenses  for  the  next  season's  business.   There  are  often  large 
amounts  of  goods  on  hand  for  the  succeeding  season  which  are  not 
included  in  the  inventory;  and  the  invoices  therefor,  which 
usually  bear  fut\ire  dating,  are  not  taken  up  as  liabilities.  As 
the  practice  is  well  established  there  seems  to  be  no  objection 
to  the  elimination  of  the  contra  asset  and  liability,  provided 
settlement  is  not  required  for  some  time  in  the  fut\ire  and  it 
is  definitely  determined  that  the  merchandise  is  on  hand  and  is 
not  included  in  the  inventory.   The  Virriter  has  known  of  cases 
where  part  of  the  next  season's  goods  have  been  sold  without 
any  charge  having  been  made  for  the  cost  thereof.   There  should 
always  be  a  footnote  on  the  balance  sheet  to  the  effect  that 
the  asset  and  the  liability  have  been  excluded. 

Any  considerable  amount  of  merchandise  out  on  consign- 
ment should  be  shown  as  a  separate  item.   The  same  applies  to 
samples,  if  inventoried  at  all.   Merchandise  held  on  consign- 
ment, for  account  of  others,  should  not  be  shown  on  the  balance 
sheet,  but  any  advances  thereon  should  be  carried  as  a  separate 
item  under  Current  Assets. 

Carrying  charges  on  merchandise  -  storage,  insurance, 
etc.,  -  may  properly  be  added  to  the  cost  of  the  merchandise 
\anless  the  total  exceeds  its  market  value.   For  balance  sheet 
purposes  it  is  usually  necessary  to  show  only  one  amount  as  the 
value  of  such  merchandise,  but  in  certain  cases  it  seems  de- 
sirable to  separate  the  carrying  charges  from  the  original  cost. 

Investments.   Under  this  head  should  be  shown  perman- 
ent or  long-term  investments,  such  as:   securities  of,  and  ad- 


40 


vances  to,  subsidiary  companies;  securities  representing  invest- 
ments of  reserves;  and  real  estate,  other  than  plant,  pxorchased 
for  investment  or  acquired  in  settlement  of  a  debt. 

If  the  items  are  too  n\jmerous  to  be  shown  separately 
on  the  balance  sheet  the  details  should  be  given  in  a  schedule 
or  in  the  comments.  The  essential  points  as  to  securities  are: 
par  value,  ntunber  of  shares  of  stock,  maturity  and  rate  of  in- 
terest of  bonds,  book  value,  and  perhaps  market  value.   It  is 
not  usually  necessary  that  investment  securities  be  carried  at 
market,  or  liquidating  value,  but  if  there  is  a  considerable 
difference  between  the  book  value  and  the  actual  investment 
value  as  determined  from  the  most  reliable  available  source, 
that  fact  should  be  brought  out  in  some  manner.  The  treatment 
of  investments  in  subsidiary  companies  in  connection  v/ith  con- 
solidated balance  sheets  is  discussed  in  Chapter  III. 

If  any  of  the  securities  are  pledged  that  fact  should 
be  indicated  on  the  balance  sheet. 

Investments  in  subsidiary  companies  may  be  exhibited 

somewhat  as  follows: 

Investments  in  Subsidiary  Companies: 
A .  B .  Company : 

Stock  -  1,000  shares 
Advances 

Total 

C.  D.  Company: 

Stock  -  100  shares 
Bonds 

Total 

Total  Investments  in  Subsidiary  Companies 


41 

SINKING  FUND 

The  composition  of  the  sinking  fund  should  be  shown  on 

the  balanca  sheet.   It  will  be  assumed  to  be: 

Cash 

Securities 
Accrued  Interest 

The  securities  should  be  fully  described.   They  may  be 
outside  securities  or  some  of  the  bonds  for  which  the  sinking 
fund  is  created,  which  have  been  purchased  out  of  the  sinking 
fxind  instalments  but  are  not  canceled  and  continue  to  bear  in- 
terest.  Such  bonds,  if  purchased  at  a  discount  or  premium, 
should  be  written  up  or  down  to  par  value,  and  when  brought  to 
par  they  may  properly  be  deducted  on  the  face  of  the  balance 
sheet  from  the  bonds  issued,  whereupon  the  sinking  fund  assets 
may  be  shown  thus:   Sinking  Fund  -  Cash  and  Accrued  Interest 
(Bonds  Deducted  from  Liabilities,  per  Contra). 

PROPERTY 

The  physical  property,  i.e.,  the  land,  buildings,  and 
equipment,  with  which  a  business  operates,  is  grouped  under 
various  heads,  the  most  common  being  Property,  Plant  Property, 
and  Property  and  Plant.   The  author  favors  the  first  of  these 
in  most  cases,  as  there  is  often  property  which  is  not  aptly 
described  as  "plant,"  even  though,  in  a  broad  sense,  it  is  em- 
ployed in  the  business;  and  the  word  "property"  seems  to  have 
acquired  a  technical  significance  so  that  it  needs  no  modifier. 
Hov/ever,  where  there  are  outside  investments  in  real  estate, 
carried  separately,  and  the  property  pertaining  to  the  business 


42 


Itself  may  be  appropriately  thus  designated,  it  may  be  better  to 

use  the  term  Plant  Property.   If  there  is  no  real  estate,  it  may 

be  appropriate  to  use  the  caption  "Equipment." 

The  usual  balance  sheet  classification  of  property  for 

a  manufactviring  concern  is  somewhat  as  follov/s: 

Land 

Buildings 

Machinery  and  Factory  Equipment 

Automobiles,  Horses,  and  V/agons 

Office  F\irniture  and  Appliances 

In  an  audit  report  the  principle  of  valuing  the  proper- 
ty should  be  made  clear  in  the  balance  sheet,  comments,  or  certi- 
ficate -  whether  the  valuation  is  at  cost,  depreciated  cost,  ap- 
praised reproduction  cost,  or  appraised  sound  value,  i.e.,  depre- 
ciated reproduction  cost  (of  course,  the  depreciation  does  not 
apply  to  land).  While  the  accountant  may  not  question  the  pro- 
priety of  adjusting  the  book  value  of  property  to  conform  to 
values  determined  by  competent  appraisers,  under  recent  condi- 
tions such  an  adjustment  almost  invariably  constitutes  apprecia- 
tion, if  not  inflation,  and  it  is  desirable  to  disclose  in  the 
balance  sheet  any  considerable  accretion  to  surplus  from  such  a 
source,  or  at  least  to  mention  that  the  appraised  value  is  used, 
80  that  any  interested  person  is  put  on  notice  and  may  thereupon 
inquire  regarding  the  effect  of  the  adjustment  upon  the  surplus. 

Provision  for  depreciation  is  generally  carried  in 
reserve  accounts,  rather  than  credited  to  the  property  accoxints. 
Such  reserves  may  be  deducted  from  the  assets  on  the  face  of  the 
balance  sheet,  in  total  or  in  detail,  or  be  shown  eunong  the 


I 


I 


43 

liabilities.   Ordinarily  it  probably  makes  very  little  differ- 
ence which,  of  these  methods  is  adopted,  except  for  the  sake  of 
uniformity,  especially  if  the  amoimts  reserved  have  little  or 
no  direct  relation  to  physical  depreciation.   However,  as  there 
are  more  cases  in  which  it  appears  to  be  desirable  for  one  reason 
or  another  to  deduct  the  reserves  from  the  assets  than  there  are 
for  showing  them  as  liabilities,  if  an  invariable  rule  is  to  be 
established  it  is  probably  better  to  deduct  them  from  the  assets. 
This  appears  to  be  logical,  as  depreciation  reserves  represent 
little,  if  anything,  more  than  bookkeeping  expedients,  designed 
to  show  the  total  provision  for  depreciation  at  any  time,  and 
to  permit  of  showing  in  the  asset  accounts  the  total  cost  of 
property,  neither  of  which  would  be  shown  if  the  depreciation 
were  credited  to  the  asset  accounts.   It  will  be  observed  that 
the  Federal  Reserve  Board  in  its  standard  form  of  balance  sheet 
recommends  the  practice  of  deducting  the  reserves  from  the 
assets;  in  that  form  the  assets  are  stated  in  more  or  less  de- 
tail but  the  reserves  are  shown  in  total  only.   On  the  other 
hand,  most  of  the  commissions  having  jurisdiction  over  public 
utilities  prescribe  that  the  reserves  shall  be  carried  as 
liabilities. 

If  no  provision  has  been  made  for  depreciation,  or 
if  the  provision  is  obviously  inadequate,  it  is  usually  neces- 
sary to  call  attention  to  the  fact  in  a  footnote. 

The  foregoing  remarks  on  depreciation  apply  equally 
to  depletion  of  natural  resources. 


44 

GOOD-WILL.  PATEin'S.  TRADE-MARKS.  ETC. 

The  only  point  to  be  considered  regarding  the  stating 
of  these  intangible  assets  in  the  balance  sheet  is  that  they 
should  be  shown  separately,  that  is,  not  included  with  the  tan- 
gible property  items.   In  those  cases  where  such  separation  is 
impracticable,  the  item  should  be  described  in  such  langioage  as 
to  indicate  clearly  that  intangibles  are  included. 

DEFERRED  CHARGES 

This  classification  is  intended  to  cover  various  ex- 
penditures which  are  applicable  to  futxire  operations,  or  which 
are  held  in  suspense  pending  determination  of  their  actual 
status.   In  many  cases  the  group  is  also  made  to  Include  work- 
ing funds,  special  deposits,  advances  for  various  purposes,  and 
accoxmts  receivable  the  collection  of  which  is  deferred.  The 
titles  used  for  this  group  of  items  are  various,  e.g.:   Deferred 
Charges,  Deferred  Debit  Items,  Deferred  Assets,  and  Prepaid  Ex- 
penses.  The  latter  two  terms  could  not  always  be  employed. 
While  the  connection  is  rather  remote,  it  is  nevertheless  in- 
teresting to  observe  that  the  Interstate  Commerce  Commission, 
in  its  standard  form  of  balance  sheet  for  steam  roads  (that 
for  electric  railways  is  virtually  the  same)  prescribes  two 
groups.  Deferred  Assets  and  Unadjusted  Debits,  classified  as 
follows: 


Deferred  Assets: 

Working  Fxund   Advances 

Insurance  and  Other  Fiinds 

Other  Deferred  Assets  (not  further  defined) 


45 

Unadjusted  Debits: 

Rents  and  Insurance  Premiums  Paid  in  Advance 

Discount  on  Capital  Stock 

Discount  on  Funded  Debt 

Property  Abandoned  Chargeable  to  Operating  Expenses 

Other  Unadjusted  Debits  (defined  as  debit  balances  in 
suspense  accounts  that  cannot  be  entirely  cleared  and 
disposed  of  until  additional  information  is  received; 
items  credited  to  operating  revenues  or  operating 
expenses  on  an  estimated  basis;  iinextinguished  dis- 
coxint  on  short-term  notes;  estimated  accrued  depre- 
ciation on  equipment  leased;  and  other  similar  items). 

The  same  commission,  in  its  classification  of  ac- 
counts for  carriers  by  water,  includes  virtually  the  same  items 
as  are  contained  in  both  the  foregoing  groups  under  the  caption 
"Deferred  Debit  Items." 

It  appears  that  the  Federal  Reserve  Board  intends 
that  only  "prepaid  expenses,  interest,  insurance,  taxes,  etc.," 
shall  be  classified  as  Deferred  Charges;  and  that  any  unusual 
items  shall  be  carried  under  the  head  of  "Other  Assets." 

For  the  purpose  of  exemplifying  principles  it  will 
be  assumed  that  the  following  items  are  included  under  the  cap- 
tion "Deferred  Charges": 

Unexpired  Insurance 

Interest  Paid  in  Advance 

Taxes  Paid  in  Advance 

Unamortized  Debt  Discovmt  and  Expense 

Experimental  Expenses 

Unamortized  Improvements  to  Leased  Property 

Unamortized  Organization  Expenses 

Deposits  with  Public  Utility  Companies,  etc. 

The  first  three  of  these  require  no  comment  except  to 

call  attention  to  the  impropriety  of  showing  net  debit  balances 

if  there  are  considerable  accrued  liabilities  involved.  For 

example,  the  company  may  have  one  account  for  all  insurance, 


46 


and  the  debit  balance  may  comprise  the  iinexplred  proportion  of 
premiums  on  fire  insurance  less  a  large  accrual  on  account  of 
liability  insurance  premium,  based  upon  the  pay-roll.  The  same 
principle  applies  to  Interest  and  taxes. 

Unamortized  Debt  Discount  and  Expense.  The  name  used 
for  this  item  is  the  customary  one  for  railroads  and  public 
utilities,  in  the  accounts  of  which  companies  it  most  frequently 
appears.   If  appropriate,  the  item  may  be  designated  more  simply 
as  Unamortized  Discoimt  on  Bonds. 

This  item  frequently  requires  particular  attention  in 
the  preparation  of  audit  reports,  as  the  amoxint  is  so  often  in- 
correct.  The  balance  in  the  account,  or  accoxints,  should  un- 
questionably represent  the  proportion  of  discoxint  and  expense 
applicable  to  the  principal  of  the  bonds  or  notes  outstanding 
at  the  date  of  the  balance  sheet,  computed  upon  the  basis  of 
the  term  during  which  Interest  will  be  paid  on  the  securities. 
Yet  it  is  found  that  companies  retire  bonds  in  advance  of  ma- 
turity, through  sinking  fxmds  or  otherwise,  crediting  Profit 
and  Loss  with  dlscoiuit  on  the  purchase  and  leaving  the  discount 
on  the  sale  to  be  written  off  over  the  original  term  of  the 
bonds.   It  is  also  occasionally  found  that  a  company  has  Issued 
short-term  notes  at  a  discoxmt  and  continues  to  carry  the  dis- 
count as  an  asset  after  maturity  with  the  intention  of  sunortlz- 
ing  it  over  the  term  of  a  refunding  issue  -  which  is  also  sold 
at  a  discoimt. 


47 

If  in  making  an  audit  it  ia  found  that  through  some 
such  method  the  asset  account  is  grossly  overstated,  and  not 
corrected,  the  balance  sheet  in  the  auditor's  report  should  so 
indicate,  either  in  the  item  itself  or  in  a  footnote.   If  the 
amoimt  of  overstatement  is  nominal  the  matter  may  be  covered  in 
the  comments  of  the  report. 

Experimental  Expenses.   The  amount  to  be  shown  thus 
should  be  the  cost  to  date  of  experimental  work  which  has  not 
yet  reached  the  point  where  its  value  may  be  determined.   It 
is  assumed  that  if  hopes  are  realized  the  cost  will  be  capi- 
talized; otherwise  it  will  be  written  off. 

Unamortized  Improvements  to  Leased  Property.  This 
item  should  represent  the  remainder  of  the  cost  of  alterations 
to,  and  fixtures,  etc.,  installed  in,  leased  property,  which 
cost  is  being  amortized  over  the  term  of  the  lease.   Buildings 
erected  on  leased  land,  and  improvements  to  leased  buildings, 
when  the  leases  cover  a  long  term,  may  properly  be  carried  as 
Property,  subject  to  depreciation,  practically  the  same  as 
property  held  in  fee. 

Unamortized  Organization  Expenses.   It  is  assumed 
that  in  this  case  it  is  not  the  intention  to  capitalize  the 
organization  expenses,  notwithstanding  that  amortization 
thereof  will  not  be  allowed  as  a  deduction  in  the  income  tax 
returns.  The  word  "unamortized"  indicates  that  some  part  has 
been  written  off;  otherwise  there  vrould  seem  to  be  no  reason 
to  use  it . 


48 

In  amortizing  such  aooounts  as  this,  the  emortization 
is  sometimes  credited  to  a  reserve,  which  is  included  among  the 
liabilities.  There  is  nothing  to  be  gained  in  this  procedure 
from  the  standpoint  of  the  balance  sheet.  However,  in  this  par- 
ticular case,  it  may  possibly  be  that  the  amount  charged  to 
Profit  and  Loss  would  in  that  manner  be  advantageously  kept  in 
eight  as  a  part  of  invested  capital  for  the  computation  of  the 
excess  profits  tax. 

CURRENT  LIABILITIES 

The  following  classification  will  be  assumed: 

Notes  Payable  -  Loans 

Trade  Notes  and  Acceptances  Payable 

Accounts  Payable 

Dividends  Payable 

Accrued  Accounts: 

Wages 

Taxes 

Interest 

Notes  and  Acceptances  Payable.   It  is  well  to  shov/ 
loans  separate  from  trade  liabilities,  as  above.  When  the  obli- 
gations are  secured  it  may  be  desirable  to  indicate  the  fact, 
although  in  most  cases  in  v;hich  specific  property  is  pledged, 
the  statement  to  that  effect  in  the  description  of  the  asset 
item  is  sufficient.   In  an  audit  report  there  is  generally  at 
least  a  summary  of  the  obligations  by  maturities,  but  such  de- 
tails as  are  given  are  U8\ially  presented  in  a  schedule  or  in 
the  comments  of  the  report.  Consideration  should  be  given  to 
the  practical  value  of  details  of  such  obligations,  in  view  of 
the  time  that  may  have  elapsed,  before  presenting  them  in  the 
report . 


49 


Accoxints  Payable.   If  desired,  the  accounts  payable 
may  be  classified  in  groups  somewhat  as  follov/s:   Trade  Credi- 
tors or  Audited  Vouchers,  Advances  or  Loans,  and  Others  (if 
any) .  However,  there  is  not  the  same  necessity  for  differen- 
tiating between  trade  and  other  accounts  as  there  is  with  ac- 
coxints  receivable,  the  only  purpose  being  to  show  that  some  are 
not  payable  immediately.  Credit  balances  in  customers'  ac- 
counts, not  offset  by  debit  balances  with  the  same  customers, 
should  be  included  in  accounts  payable;  they  may  be  so  de- 
scribed if  desired  but  it  is  not  usually  necessary.   It  is 
usually  desirable  to  show  separately  accounts  vtrith  affiliated 
companies. 

In  the  opinion  of  the  writer  no  deduction  should  be 
made  from  accounts  payable  for  cash  discoiints  which  may  be 
taken  in  settlement  of  the  accounts,  for  the  reason  that  the 
discount  is  earned  when  the  account  is  paid  and  not  when  the 
p\irchase  is  made. 

If  any  accounts  payable,  together  with  the  related 
assets,  be  omitted,  as  is  frequently  done  in  the  case  of  pur- 
chases of  goods  for  the  succeeding  season  (see  Inventories) 
the  fact  should  be  covered  by  a  footnote. 

Dividends  Payable.   Dividends  declared  but  not  paid 
at  the  date  of  the  balance  sheet  should  be  included  in  the 
current  liabilities,  as  above.  Many  conipanies  regard  pre- 
ferred stock  dividends  as  fixed  charges  and  accrue  them  on 
the  books.   Such  accruals,  at  anv  date  other  than  immediately 


L 


50 


preceding  the  date  of  payment,  should  be  treated  as  reserves 
rather  than  current  liabilities. 

Accrued  Wages.   This  amount  should  represent  the  ac- 
tual or  estimated  accrual  of  wages  at  the  date  of  the  balance 
sheet,  payable  in  the  subsequent  period.  V/ages  or  salaries  due, 
and  unclaimed,  or  for  any  other  reason  unpaid,  should  be  in- 
cluded under  the  hsad  of  Accounts  Payable,  Accounts  and  V/ages 
Payable,  or  Unclaimed  V/ages. 

Accrued  Taxes.   This  item  is  intended  to  represent 
taxes  accrued  but  not  due  at  the  date  of  the  balance  sheet. 
Any  that  are  due  and  unpaid  should  be  shown  separately,  as 
Taxes  Payable,  or  included  in  Accounts  Payable. 

Many  companies  object,  on  account  of  the  effect  upon 
the  comparison  of  current  assets  with  current  liabilities,  to 
classifying  as  Accrued  Taxes  the  provision  for  Federal  income 
and  excess  profits  taxes,  part  payment  of  which  is  considerably 
deferr3d;  and  it  is  difficult  to  controvert  their  contention 
wvhsn  the  business  is  continuing  and  prosperous.  However,  it 
is  dangerous  to  follow  this  process  of  reasoning  to  its  con- 
clusion and  regard  such  taxes  as  payable  out  of  the  income  of 
the  period  in  which  paid. 

If  a  client  has  not  made  provision  for  all  accruals 
of  taxes,  the  auditor  should  state  the  fact  in  a  footnote  on 
the  balance  sheet.   If  practicable,  the  amo\ints  of  such  accru- 
als, especially  of  Federal  taxes,  should  be  given  in  the  foot- 
note. 


51 

The  asset  of  taxes  paid  in  advance  should  not  be  de- 
ducted from  the  liability  for  accrued  taxes. 

Accrued  Interest.  This  liability  may  be  divided,  if  con- 
sidered desirable,  into  such  items  as  Accrued  Interest  on  Bonds  and 
Accrued  Interest  on  Notes  Payable.  Any  interest  matured  and  unpaid 
should  be  shovm  as  a  separate  item  v/ith  an  appropriate  title. 

Interest  paid  in  advance,  that  is,  on  notes  discounted, 
should  not  be  deducted  from  accrued  interest  payable. 

FUITDED  DEBT 

The  indebtedness  shovm  under  this  caption  is  dis- 
tinguished from  floating  debt,  shown  \inder  Cvirrent  Liabilities, 
by  its  term  rather  than  its  security.  Usually  bonds,  notes,  or 
mortgages  maturing  in  less  than  a  year  are  treated  as  Current; 
as  are  also  any  longer-term  securities  which  have  matured  but  are 
unpaid,  or  which  will  mature  the  next  day. 

The  items  should  be  fully  described  in  the  balance 
sheet,  and  if  there  be  only  one  the  caption  may  be  omitted.  The 
date,  or  year,  of  matxirity  is  especially  important. 

Securities  held  in  the  treasury  and  in  sinking  funds 
are  usually  deducted  from  the  liabilities.   If  for  any  valid 
reason  their  book  value  is  different  from  par  value,  it  ie,  of 
course,  impossible  to  deduct  them  and  they  should  be  carried  as 
assets.   If  treasury  seciirities  have  been  purchased  at  a  dis- 
count to  be  held  only  temporarily,  nothing  is  gained  by  v<riting 
them  up  to  par. 


52 

The  following  illustrates  several  conditions  under  '.vhich 
bonds  may  be  issued  and  held: 

First  Mortgage,  Sinking  Fund,  5^-.  Bonds,  due 
1925  (Authorized,  $1,000,000.00): 

Issued $500,000.00 

Less: 

Held  to  Redeem  Outstanding 

Underlying  Bonds $100,000.00 

Held  by  Sinking  Fund 

Trustee 100.000.00  200.000.00 

Outstanding $300,000.00 

Refxanding  Mortgage,  5^  Bonds,  due  1950: 

Issued! $200, 000 .00 

Less  Held  in  Treasury: 

Deposited  with  Blank  Com- 
mission   $  50,000.00 

Unpledged 50.000.00  100.000.00 

Outstanding 100,000.00 

General  Mortgage,  6^  Bonds,  due  1942: 

Issued $100,000.00 

Less  in  Treasury  -  Pledged  to  Secure  ITotes 

Payable 100.000.00 

Outstanding nil 

Six  per  cent  Debenture  Notes,  due  serially, 
1921-1925: 

Issued $100,000.00 

Less  Retired  through  Sinking  Fund 50.000.00 

Outstanding 50,000.00 

DEFERRED  CREDITS 

This  group  is  just  the  opposite  of  Deferred  Charges.   It 
is  intended  to  include  all  receipts  on  account  of  income  which  is 
not  yet  earned,  such  as  interest  and  rent  collected  in  advance,  and 
any  receipts  the  disposition  of  which  has  not  been  determined.   The 
term  Deferred  Credits  is  often  made  to  cover  advance  collections  on 


53 

sales,  xinpresented  coupons,  etc.,  but  when  inventories  are  in- 
cluded in  current  assets  such  advance  collections  may  well  be 
properly  classified  as  current  liabilities,  notwithstanding  that 
a  part  of  the  amount  collected  may  represent  profit. 


RESERVES 


follows; 


The  items  xinder  this  caption  will  be  assumed  to  be  as 


Depreciation 
Doubtful  Accounts 
Donated  Treasiiry  Stock 
Sinking  Fund 
Contingencies 

Depreciation.  As  stated  in  the  foregoing,  under  the 
head  of  Property,  reserves  for  depreciation  may  be  deducted 
from  the  corresponding  property  items,  or  be  carried  among  the 
liabilities,  although  the  former  treatment  is  generally  pre- 
ferred. On  whichever  side  of  the  balance  sheet  they  are  car- 
ried, it  is  thought  to  be  usually  desirable  to  show  as  much  de- 
tail of  the  reserves  as  of  the  depreciable  property.   It  is 
often  appropriate  to  show  the  details  in  a  schedule,  or  in  the 
comments,  in  the  case  of  an  audit  report. 

Doubtful  Accounts.   The  reserves  for  doubtful,  or 
uncollectible,  accounts  receivable,  or  "bad  debts,"  may  also 
be  deducted  from  the  corresponding  asset  item  or  items,  as 
previously  stated,  although  there  are  cases  when  it  appears 
that  it  may  not  be  insisted  upon. 


54 

Donated  Treasury  Stock.   The  subject  of  accounting  for 
donations  of  capital  stock  is  a  large  and  much-debated  one.   It 
v/ill  only  be  touched  upon  here . 

Some  accountants  assert  that  the  proceeds  from  sales 
of  stock  issued  for  property  (usiially  intangible)  and  donated 
back  to  the  company  to  provide  working  capital,  should  be  credit- 
ed to  the  property  account  affected.   In  the  opinion  of  the 
author  this  is  usually  improper,  vmnecessary,  and  futile  -  im- 
proper because  it  overrides  the  action  of  the  directors  in  valu- 
ing the  property;  unnecessary  because  no  one  is  likely  to  be 
misled  regarding  the  actual  value  of  the  property  in  any  event; 
and  futile  because  the  deduction  of  the  proceeds  from  sales  of 
the  donated  stock  does  not  usually  result  in  a  much  more  accu- 
rate statement  of  actual  values. 

If  not  deducted  from  the  stated  value  of  property,  the 
proceeds  from  sales  of  donated  stock  become  capital  surplus. 
But  before  the  stock  is  sold  it  is  necessary  to  record  it  as  in 
the  treasury.  Opinions  differ  as  to  the  value  to  be  placed  upon 
such  stock  while  held  in  the  treasiiry.   In  the  opinion  of  the 
author  it  makes  little  difference  whether  the  stock  is  carried 
at  par  or  at  a  nominal  value,  provided  the  offsetting  credit  is 
not  carried  to  surplus.   The  preferred  method  is  therefore  as 
follows:   Carry  the  treasury  stock  at  par,  deducting  it  from 
the  amount  issued;  carry  the  offset  in  a  Reserve  for  Donated 
Treasury  Stock;  as  stock  is  sold  credit  the  proceeds  to  a  capi- 
tal surplus  account,  which  may  be  entitled  Donated  Working 


55 


Capital  or  S\irplu8  Arising  from  Sales  of  Donated  Capital  Stock, 
and  clear  the  Treasury  Stock  and  Reserve  for  Donated  Treasury 
Stock  accounts. 

Sinking  Fund.  As  sinking  fund  reserves  are  frequently 
encountered  when  a  company  has  issued  bonds  v/ith  a  sinking  fund 
provision,  the  matter  is  dealt  with  under  this  head,  although 
the  word  "reserve,"  as  applied  to  provision  for  paying  an  obli- 
gation for  which  the  company  has  received  value,  is  a  misnomer. 
Many  sinking  fund  clauses  in  mortgages  stipulate,  evidently  for 
the  better  security  of  the  bondholders,  that  the  sinking  fund 
instalments  must  be  paid  "out  of  earnings";  and  this  is  often 
construed  as  effecting  a  reduction  of  the  earnings  to  which  the 
stockholders  are  entitled.  This  interpretation  is  illogical 
and  should  be  overridden  if  practicable.  Bonds  are  invariably 
issued  to  pay  for  permanent  capital  assets.   It  being  assumed 
that  due  provision  is  made  for  depreciation  or  depletion  of 
the  property  during  the  life  of  the  bonds,  there  should  not  be 
a  double  charge  against  income  to  pay  for  the  property,  that 
is,  to  keep  the  capital  intact.  There  should  only  be  a  segre- 
gation of  assets  sufficient  to  liquidate  the  obligation  at 
maturity.   If,  notwithstanding  the  fallacy  of  so  doing,  amounts 
equivalent  to  the  payments  into  the  sinking  f\ind  are  charged 
against  current  income,  they  should  be  credited  to  an  Appro- 
priated Surplus  acco\int,  which  should  be  shown  on  the  balance 
sheet  under  the  head  of  Surplus.  Upon  liquidation  of  the 


56 


bonds  by  means  of  the  sinking  fund  assets  there  will  be  no  fur- 
ther reason,  or  excuse,  for  keeping  the  reserve  separate  and  it 
will  become  free  surplus,  available  for  dividends. 

Contingencies.  The  only  point  regarding  this  reserve 
that  need  be  mentioned  is  that  it  should  be,  in  fact,  a  reserve 
for  contingencies;  that  is,  it  should  not  include  provision  for 
kno\vn  charges  even  though  their  amounts  may  not  be  determined. 
If  the  reserve  is  of  a  general  nature,  including,  for  example, 
provision  for  depreciation,  its  designation  should  be  such  as 
to  disclose  that  fact. 

CAPITAL  STOCK 

If  there  is  more  than  one  class  of  capital  stock  it 
is  generally  desirable  to  show  each  as  a  main  item  of  the  bal- 
ance sheet,  rather  than  to  combine  them  as  a  group.  The  total 
of  all  classes  usually  has  no  significance,  and  may  indeed  be 
misleading,  as  the  shares  of  one  class  usually  differ  from  the 
shares  of  another  class  in  respect  of  the  proportion  of  sur- 
plus or  deficit  applicable  thereto. 

The  balance  sheet  should  sho^v,  as  to  each  class  of 
capital  stock,  full  information  regarding  the  niimber  of  shares 
authorized,  issued,  and  outstanding,  and  the  par  value  per 
share,  if  any.   In  the  case  of  preferred  stock  it  is  usually 
desirable  to  state  whether  it  is  cxomulative  or  non-c\imulative 
and  the  rate  of  dividend;  also  any  other  essential  facts  re- 
garding the  relation  of  the  preferred  to  the  common. 


57 

There  are  two  general  methods  of  stating  the  authorized 
issue,  exemplified  as  follows: 

(1)  Common  Capital  Stock  -  Shares 

$100.00  each: 

Authorized,  1,000  shares.   $100,000.00 

Less  Unissued,  100  shares    10,000.00 

Issued  and  Outstanding,  900 

share s $90,  000 .  00 

(2)  Common  Capital  Stock  -  Authorized,  1,000 

shares  of  $100.00  each;  Outstanding, 

900  shares 90,000.00 

It  is  believed  that  the  latter  method  is  preferable. 

The  method  of  showing  a  lesser  amoxint  outstanding  than 
issued  is  illustrated  as  follows: 

Preferred  Capital  Stock  -  8^, 
Cumulat  ive : 
Authorized  and  Issued,  1,000 

shares  of  $100.00  each $100,000.00 

Less  in  Treasury,  100  shares.    10.000.00 

Outstanding,  900  shares $90,000.00 

This  treatment  presupposes  that  the  treasiiry  stock  is 
carried  on  the  books  at  par  value.   If  its  cost  to  the  company 
is  less  than  par,  and  it  is  likely  to  be  disposed  of  for  less, 
it  is  equally  proper  to  carry  it  as  an  asset  at  cost  or  realiz- 
able value,  or,  if  donated,  at  a  nominal  value. 

When  capital  stock  is  subscribed  for  but  not  issued, 
the  subscriptions  are  us\ially  included  under  the  head  of  Capital 
Stock,  somewhat  as  follows: 


58 

Class  "A,"  Participating,  7fo,    Cumu- 
lative, Preferred  Capital  Stock 
(Authorized,  1,000  shares  of 
$100.00  each): 

Issued,  500  shares $50,000.00 

Subscriptions  -  50^  Paid  - 

100  shares 10,000.00 

Total $60, 000 , 00 

This  treatment  contemplates  carrying  the  uncollected 
balance  on  the  subscriptions  as  an  asset.   It  is  sometimes  de- 
sirable to  show  as  a  liability  only  the  amounts  collected  on 
subscriptions. 

When  capital  stock  has  no  par  value  that  fact  should 
be  indicated.  The  value  at  which  it  is  carried  should  be  the 
consideration  received  by  the  company  for  its  issue.   There  is 
a  growing  practice  of  placing  a  value  upon  non-par-value  stock 
of  less  than  the  consideration  act\aally  received,  '.vhich  has 
legal  sanction  in  some  States.   In  New  York  State  the  minimum 
value  for  which  such  stock  may  be  issued  is  $5.00  a  share,  and 
the  capital  may  not  be  reduced,  by  payment  of  dividends,  below 
the  value  stated  in  the  certificate  of  incorporation.  Accord- 
ingly, advantage  is  being  taken  of  the  wording,  if  not  the  in- 
tent, of  the  law  and  a  value  of  $5.00  put  upon  each  share  re- 
gardless of  the  consideration  received,  the  obvious  purpose  be- 
ing to  enable  the  corporation  to  pay  dividends  out  of  actual 
capital  if  desired.  Any  excess  of  capital  paid  in  by  stock- 
holders over  an  arbitrary  value  placed  upon  the  stock  should 
be  shown  as  Capital  Surplus,  preferably  \inder  the  head  of 
Capital  Stock,  or,  as  it  is  sometimes  called.  Share  Capital. 


59 


Assuming  that  there  is  no  preferred  stock,  or  if  there 
is,  that  its  share  in  the  profits  is  limited  to  its  stated  divi- 
dend rate,  and  that  the  dividend  thereon  to  date  has  been  paid 
or  reserved,  the  stock  without  par  value  may  be  stated  as  includ- 
ing the  surplus,  somes7hat  as  follows: 

(1)  Common  Capital  Stock  -  without 

par  value: 

Stock  Issued  and  Outstand- 
ing -  1,000  shares 
(Authorized,  2,000 
shares) $53,243.27 

Surplus 21.659.46  $74, 905 . 73 

(2)  Common  Capital  Stock: 

Stock  Authorized  and  Out- 
standing -  1,000  shares 
of  no  par  value,  but  of 
a  declared  value  of 

$5.00  each $  5,000.00 

Capital  Surplus 48,246.27 

Profit  and  Loss  Surplus 21,659.46   74,905.73 

While  some  such  combination  as  one  of  the  foregoing  is 
undoubtedly  logical  and  in  many  cases  desirable,  the  author  does 
not  recognize  any  inherent  difference  betv/een  stock  with  par 
value  and  stock  without  par  value  with  respect  to  the  relation 
of  the  stock  to  the  surplus,  and  believes  that  in  most  cases  such 
a  direct  combination  as  the  above  is  not  called  for,  preferring 
to  state  non-par-value  stock  at  the  value  originally  placed  upon 
it,  the  same  as  par-value  stock.   It  is  alv/ays  appropriate  to 
group  all  classes  of  stock  and  surplus  under  the  head  of  "Capi- 
tal Stock  and  Surplus"  or  "Capital,"  or  to  bring  out  the  dis- 
tinction between  common  stock  and  preferred  stock  which  is 


: 


60 

limited  as  to  dividends,    by  allocation  of   ths   surplus  or  deficit 
to   the   common  stock,    somevifhat    as  follov/s: 

Preferred  Capital   Stock $100,000.00 

Equity  of   Common   Stockholders: 

Common  Capital   Stock $100,000.00 

Surplus 100,000.00      200,000.00 

Such  allocation  of   surplus  might,    if  practicable,    be 
extended  to  exhibit   the  values  of  participating  preferred  stocks. 
The  principle  applies  whether  or  not   the   several  classes  of 
stock  have  a  par  value. 

SURPLUS 

While  the  word  "surplus"  literally  denotes  the  excess 
of  assets  over  liabilities  and  original  capital,  when  employed 
without  explanation  of  its  composition  it  is  usually  intended 
to,  and  in  fact  should,  mean  earned  surplus,  as  distinguished 
from  capital,  or  special  surplus.  The  latter,  hovi^ever  specifi- 
cally described,  should  include  paid-in  capital  in  excess  of 
the  stated  value  of  capital  stock;  donated  capital;  apprecia- 
tion of  intangible  values;  and  appreciation  of  property  repre- 
senting vunearned  Increment,  which  may  with  propriety  be  con- 
sidered for  some  purposes  but  may  not  constitute  distributable 
profit . 

The  term  "siirplus"  may  also  be  assumed  to  denote  free 
surplus,  i.e.,  surplus  regarded  as  available  for  distribution 
and  not  appropriated  for  some  other  purpose. 

Opinions  of  prominent  accountants  differ  considerably 
with  regard  to  the  necessity  for  segregating  as  capital,  or 


61 

special  8\xrplu8,  some  or  all  of  the  extraordinary  credits  cited 
above,  it  being  argued  by  some  that  reasonable  appreciation  of 
property  is  in  fact  earned  surplus,  and  by  others  that  the  sur- 
plus is  simply  the  balancing  figure  and  that  the  word  is  not 
necessarily  synonymous  with  Undivided  Profits.   In  controversion 
of  all  such  arguments,  it  is  submitted  that  the  word  "siirplus" 
is  generally  understood,  not  only  by  laymen  but  by  most  acco"unt- 
ants,  to  denote  free  surplus  from  normal  operations,  and  that 
the  inclusion  in  a  balance  sheet  item  thus  described  of  consider- 
able amounts  of  such  extraordinary  credits  as  the  above,  without 
qualification,  may  put  the  accoimtant  in  the  position  of  tacitly 
co\intenancing,  if  not  abetting,  misinformatlDn  of  readers  of  the 
report  who  are  not  cognizant  of  the  conditions.   In  cases  in- 
volving the  valuation  of  assets,  adequate  qioalif ication  may  be 
expressed  in  the  description  of  the  asset  items  of  the  balance 
sheet,  by  fully  stating  the  basis  of  valuation,  preferably 
showing  the  amoiint  of  appreciation.   It  is  thought  not  to  be 
sufficient  to  refer  in  the  balance  sheet  item  Surplus  to  the 
accompanying  statement  of  income  and  profit  and  loss  which 
shows  the  credits  in  question,  as  the  balance  sheet  should 
generally  speak  for  itself  as  to  such  important  features,  and, 
furthermore,  in  succeeding  years  the  items  will  not  be  shown  on 
the  accompanying  statement. 

A  special  surplus  representing  appreciation  of  proper- 
ty should  be  charged  with  the  proper  proportion  of  subsequent 
depreciation,  depletion,  or  amortization  of  that  property.  This 


62 

mayb3  done  by  crediting  the  property  or  reserve  account  direct- 
ly, or  by  crediting  Profit  and  Loss  as  a  partial  offset  to  the 
depreciation,  depletion,  or  amortization,  based  upon  the  appre- 
ciated value,  previously  charged  to  operations  and  credited  to 
the  property  or  reserve  account.   Under  either  method  the  pro- 
portion of  depreciation,  etc.,  applicable  to  the  appreciation 
in  value  becomes  "realized  appreciation,"  and  as  such,  is  earned 
surplus. 

There  is  no  objection  to  crediting  to  Sxirplus  a  pre- 
mivun  on  the  sale  of  capital  stock  of  a  successfully  established 
company. 

In  accounting  parlance  the  word  surplus,  as  applied 
to  co/nr.'.ercial  companies,  is  an  evolution  from  Profit  and  Loss 
Balance;  therefore,  the  item  is  often  described  as  Profit  and 
Loss  Surplus.  There  seems  to  be  no  present  necessity  for  the 
prefix  "Profit  and  Loss"  lonless  it  is  necessary  to  distinguish 
such  surplus  from  Capital  Surplus  or  some  other  special  form 
of  surplus. 

Representative  accountants  employ  two  general  methods 
of  exhibiting  the  surplus  in  a  balance  sheet.   In  one  the  bal- 
ance at  that  late  only  is  shown,  with  a  reference  to  the  accom- 
panying Statement  of  Income  and  Profit  and  Loss  -  thus:  Sur- 
plus, per  Exhibit  "B, "  $100,000.00   In  the  other,  whether  or 
not  there  is  a  Statement  of  Income  and  Profit  and  Loss,  there 
is  shown  in  the  balance  sheet  the  balance  of  surplus  at  the 
beginning  of  the  fiscal  period,  a  siimmary  of  the  charges  and 


63 


credits  for  the  period,  and  the  balance  at  the  end,  somewhat  as 
follows: 

Surplus: 

Balance,  January  1,  1919 $100,000.00 

Surplus  for  the  Year 50.000.00 

Total $150,000.00 

Less: 

Charges  applicable 

to  prior  period 

(net) $10,000.00 

Dividends 40.000.00   50.000.00 

Balance,  December  31,  1919 $100,000.00 

If  a  Statement  of  Income  and  Profit  and  Loss  is 
rendered,  that  statement  may  be  referred  to  in  the  item  "Surplus 
for  the  Year." 

The  essential  difference  between  the  two  methods  exem- 
plified in  the  foregoing  is  that  under  the  first  method  all 
profit  and  loss  or  surplus  charges  and  credits  are  shovm  in  the 
profit  and  loss  statement  rather  than  in  the  balance  sheet. 
^Nhen   the  balance  sheet  only  is  rendered,  it  is  generally  desir- 
able to  show  a  summary  of  the  surplus  in  the  balance  sheet,  as 
under  the  second  method,  unless  there  is  objection  to  disclos- 
ing the  results  of  operations  or  the  dividends. 

As  stated  under  the  preceding  caption,  "Capital  Stock, " 
in  some  cases  it  seems  desirable  to  combine  the  surplus  with  the 
capital  stock. 

It  is  ordinarily  considered  proper  to  show  a  deficit 
on  the  asset  side  of  the  balance  sheet,  but  if  there  is  a  capi- 


I 


64 


tal  surplus  it  seems  desirable  to  deduct  the  operating  deficit 
therefrom.   In  some  special  statements,  it  is  deducted  from  the 
capital  stock  to  show  the  actual  net  worth. 

CAPITAL  (Sole  Proprietorship  or  Partnership) 

In  the  balance  sheet  of  a  sole  proprietorship  or 
partnership  there  is  us\aally  one  item,  viz.,  "Capital,"  v/hich 
corresponds  to  the  capital  stock  and  surplus  of  a  corporation. 
However,  the  proprietor  or  partners  may  prefer  to  carry  sepa- 
rately the  original  capital  invested  or  such  amount  (including 
subsequent  investments  of  new  capital  or  accretions  from  in- 
come) as  is  regarded  as  the  fixed  capital,  the  remainder  being 
shown  as  Undivided  Profits. 

If  the  Undivided  Profits  are  kept  separate  it  seems 
to  be  appropriate  to  show  in  the  income  statement  the  with- 
drawals d\iring  the  period  and  the  balances  at  the  beginning  and 
end  of  the  period.  The  balance  sheet  items  would  then  appear 
somevtThat  as  follows: 

Capital: 

Investment $300,000.00 

Undivided  Profits,  per  Ex- 
hibit "B" 50,000.00 

Total  Capital $350,000.00 

'There  only  one  account  is  carried  for  capital,  that 
fact  is  of  itself  no  logical  reason  for  treating  withdrawals  of 
income  differently,  but  it  may  well  be  an  indication  that  there 
id  no  intention  or  desire  to  differentiate  between  capital  in- 


65 

vested  and  accretions  through  income,  and  possibly  that  it  is 
not  regarded  as  important  whether  or  not  the  withdrawals  exceed 
the  income.   In  any  event,  the  elements  of  capital  other  than 
imdivided  profits  have  no  proper  place  in  a  statement  of  opera- 
tions.  Therefore,  if  an  invariable  rule  is  to  be  established, 
it  is  better  in  such  cases,  in  the  opinion  of  the  author,  to 
carry  the  net  credit  to  capital  on  account  of  operations  from 
the  income  statement  to  a  svimmary  of  the  capital  account  for 
the  year,  which  may  be  shown  in  the  balance  sheet,  in  the  com- 
ments of  an  audit  report,  or  as  an  addendum  to  the  income  state- 
ment -  which  in  that  case  should  be  entitled  "Statement  of  In- 
come and  Capital  Accoxint . "   It  seems  appropriate  generally  to 
show  the  information  in  the  balance  sheet,  somewhat  as  follov/s: 

Capital: 

Balance,  January  1,  1919 $325,000.00 

Additional  Investment  during 

the  Year 50, 000 .  00 

Net  Income  for  the  Year,  per 

Exhibit  "B" 50.000.00 

Total $425,000.00 

Less  Withdrawals 75,000.00 

Balance,  December  31,  1919 $350, 000.00 

In  a  balance  sheet  of  a  partnership  the  balance  of 
capital  may  be  divided  to  show  the  respective  interests  of  the 
partners. 

CONTINGENT  ASSETS  AND  LIABILITIES 

Contingent  liabilities  fall  into  two  classes  -  those 
which  are,  and  those  which  are  not,  offset  by  corresponding 


I 

1 


66 

contingent  assets.   Of  the  former  class  are  liabilities  on  ac- 
coiint  of  notes  and  drafts  discounted,  accommodation  endorsements 
ana  guaranties,  and  unused  letters  of  credit;  of  the  latter 
class  are  continuing  guaranties  of  product  and  legal  or  other 
claims  for  v/hich  there  can  be  no  recoupment. 

It  is  important  that  the  balance  sheet  disclose  any 
considerable  amount  of  contingent  liability.   This  is  usually 
done  by  means  of  footnotes,  but  where  there  are  offsetting  con- 
tingent assets  the  items  are  freiuently  shown  on  both  sides  and 
included  in  the  totals.   For  example,  the  most  common  item,  cus- 
tomers' notes  and  acceptances  discounted,  may  be  shown  thus: 

Asset  -  Notes  and  Acceptances  Receivable 

Discoxinted  (see  contra) $100,000.00 

Liability  -  Discounted  Notes  and  Accept- 
ances Receivable  (see  contra) 100,000.00 

UNDECLARED  DIVIDENDS  ON  CUMULATIVE  PRSFERRED  STOCK 

There  is  no  legal  justification  for  setting  up  a  lia- 
bility for  dividends  \intil  they  are  declared.   However,  there  is 
no  objection  to  accruing  a  dividend  on  preferred  stock  when  it 
is  known  that  it  will  be  paid.   This  is  often  done,  especially 
in  public  utility  corporations,  and  is  frequently  desirable  in 
connection  with  determining  the  balance  of  surplus  applicable 
to  the  common  stock.  As  such  accruals  do  not  in  fact  consti- 
tute liabilities,  they  should  be  treated  as  reserves. 

V/hen  a  corporation  is  in  arrears  in  declaring  divi- 
dends on  cumulative  preferred  stock,  it  is  v/ell  to  state  the 


67 


fact  in  a  footnote  to  the  balance  sheet,  as  such  arrearage  has  a 

decided  bearing  upon  the  value  of  both  preferred  and  common  stocks. 

4>  «  «  *  * 

For  most  businesses  it  is  desirable  to  present  the  bal- 
ance sheet  in  comparative  form,  unless  it  is  known  that  it  is  not 
desired  by  the  officials.   This,  of  course,  should  be  done  in  an 
audit  report  only  if  the  accounts  have  been  audited  by  the  account- 
ant for  the  preceding  period,  or  as  of  the  end  of  that  period, 
unless  the  client  desires  to  have  comparisons  shown  subject  to 
qualification  regarding  the  figiires  for  the  prior  date.  Very  often 
the  client  would  appreciate  the  comparisons  even  though  the  ac- 
countant might  have  to  qualify  the  statement  with  regard  to  the 
figures  for  the  prior  date  by  reason  of  his  not  having  audited  the 
accoxints  at  that  time. 

A  comparative  balance  sheet  may  show  the  figures  for 
both  dates  and  the  comparisons,  in  which  case  it  would  be  entitled, 
e.g.,  "Balance  Sheet,  December  31,  1919  and  1918,  and  Comparison;" 
or  the  figures  for  the  prior  date  may  be  omitted,  when  it  would  be 
entitled,  e.g.,  "Balance  Sheet,  December  31,  1919,  and  Comparison 
with  December  31,  1918."   Business  men  generally  like  to  see  the 
figures  for  both  dates.   The  c\irrent  date  should  be  at  the  left. 

The  comparison  may  be  shown  in  two  columns,  increase 
and  decrease,  or  in  one  col\imn,  increases  in  black  and  decreases 
in  red.   The  latter  method  is  generally  preferred. 

In  the  rather  rare  cases  where  it  is  desired  to  show  on 
one  sheet  the  balance  sheets  for  more  than  two  dates  no  comparison 
is  usually  wanted.   In  such  a  case  an  appropriate  heading  is,  e.g., 
"Balance  Sheet,  December  31,  1919,  1918,  and  1917." 


68 


In  the  preparation  of  comparative  balance  sheets  it  is 
often  necessary  to  change  the  arrangement  of  items  at  the  ^rior 
date  in  order  to  effect  a  true  comparison  with  the  current  date. 
In  some  cases  it  is  desirable  for  this  purpose  to  ahovj   items  of 
the  prior  date  in  red. 

*  *  ♦  ♦  ♦ 

V.Tiile  qualifications  regarding  balance  sheet  items  in 
an  audit  report  are  usually  expressed  in  the  comments,  they 
should  be  made  on  the  face  of  the  balance  sheet,  whether  or  not 
repeated  in  the  cor.iments,  if  they  are  so  material  as  to  have  a 
decided  bearing  upon  the  financial  condition. 

Judicious  use  should  be  made  of  schedules  for  the 
presentation  of  details  which  if  shown  in  the  balance  sheet 
itself  would  make  that  exhibit  cumbersome.   As  has  been  seen, 
it  is  also  appropriate  in  many  audit  reports  to  utilize  the  com- 
ments for  displaying  details. 

«   4>   *   >tt   4< 

Following  are  specimen  balance  sheets  and  statements 
of  financial  condition  of  single  concerns  which  are  illustra- 
tive of  the  practice,  under  several  varieties  of  conditions, 
of  perhaps  most  prominent  American  accoiontants.   It  is  not 
claimed  that  the  whole  field,  or  any  considerable  part  of  it, 
is  covered,  but  it  is  thought  that  the  solutions  to  most  of 
the  problems  regarding  form  which  are  commonly  encotontered  in 
actual  practice  are  either  exemplified  or  are  suggested  by 
analogy,  excepting  where  the  forms  to  be  used  are  prescribed 
by  some  jurisdictive  authority,  such  as  a  public  commission. 


69 

Form  1  is  a  simple  balance  sheet  of  a  corporation  at 
a  single  date,  vertical  arrangement,  presumed  to  be  accompanied 
by  a  statement  of  income  and  profit  and  loss,  which  is  referred 
to  in  the  statement  as  Exhibit  "B." 

Form  2  is  similar,  and  illustrates  the  usioal  manner  of 
exhibiting  a  deficit  and  one  method  of  showing  donated  stock  in 
the  treasury  and  the  credits  resulting  from  sale  and  valiiation 
of  donated  stock. 

Form  3  is  a  still  simpler  balance  sheet  of  a  sole  pro- 
prietor, in  which  no  classification  of  the  items  is  made  and  the 
changes  in  capital  during  the  year  are  shown. 

Form  4  is  a  condensed  balance  sheet  of  a  corporation, 
with  some  new  features,  including  a  footnote. 

Form  5  is  a  balance  sheet  of  a  branch,  the  balancing 
account  of  which  is  with  the  main  office. 

Form  6  is  a  more  elaborate  balance  sheet  of  a  corpora- 
tion, lateral  arrangement,  exemplifying  among  other  things,  the 
use  of  schedules  and  the  summarizing  of  changes  in  surplus  dur- 
ing the  year. 

Form  7  is  a  condensed  balance  sheet  of  an  association 
whose  capital  is  in  the  form  of  funds,  shov/ing  such  funds  and 
their  investment.   This  statement  is  not  literally  a  balance 
sheet,  as  certain  liabilities  are  deducted  from  the  assets  to 
preserve  the  arrangement,  but  it  appears  that  no  harm  can  ensue 
from  using  the  commonly  accepted  title.   It  is  regarded  as 
proper  to  use  the  term  "fiind"  to  denote  a  liability  of  auch  an 
association  or  institution. 


I 


70 

Form  8  is  a  balance  sheet  by  departments,  a  bre/.ing 
company  having  been  selectad  as  an  illustration.  This  statement 
exemplifies  the  columnar  arrangement,  where  it  is  necessary  to 
idraw  a  line  under  each  total  or  major  item,  except  in  the  com- 
paratively rare  case  exhibited  under  Liabilities  where  there  are 
no  subordinate  items  below  the  total  of  current  liabilities. 

Form  9  is  a  typical  balance  sheet  of  a  stock  broker- 
age firm.   An  additional  interesting  feature  is  the  statement 
of  the  partners'  capital  accounts. 

Form  10  is  a  comparative  balance  sheet,  vertical  ar- 
rangement, in  which  the  amounts  for  both  dates  are  shown.  The 
amounts  for  December  31,  1919,  are  those  shown  in  Form  1. 

Form  11  is  a  comparative  balance  sheet,  lateral  ar- 
rangement, in  which  the  sunounts  for  the  prior  date  are  not 
shown.   The  amounts  for  December  31,  1919,  are  those  shavn  in 
Form  6,  but  the  footnote  is  different. 

Form  12  is  a  comparative  balance  sheet  in  which  the 
amounts  for  both  dates  are  shown  in  a  six-col\iinn  arrangement. 
This  form  is  in  use  by  many  accountants,  being  preferred  by 
them  to  the  more  compact  form  illustrated  in  Form  11,  in 
which  it  is  necessary  to  dravf  lines  tinder  the  major  items. 
While  the  extended  form  possesses  the  advantage  of  presenting 
an  uninterrupted  perpendicular  view  of  the  major  items,  the 
horizontal  alignment  of  type  intermittently  spread  over  so 
much  space,  is  not  easily  followed.   In  the  opinion  of  the 
author,  the  compact  form  is  generally  more  satisfactory. 


71 

Form  13  is  a  statement  of  financial  condition,  de- 
signed especially  to  furnish  a  banker  with  a  statement  of  assets 
and  liabilities  in  the  form  which  it  is  thought  will  best  suit 

;  his  requirements  and  will,  therefore,  anticipate  his  computa- 

r,  tions.  When  appearing  in  an  audit  report,  such  a  statement 
usually  has  a  certificate  appended.   It  may  also  furnish  in  a 

i   footnote  other  information,  such  as  the  amount  of  sales  for  the 

;  period. 

Form  14  is  the  same  as  Form  13  with  the  addition  of 
comparisons  v/ith  a  prior  date,  which  are  often  appropriate  as 
explaining  relatively  large  items  of  merchandise,  receivables, 
or  current  liabilities. 

Form  15  is  submitted  as  a  suggestion  of  what  may  be 
done  to  present  a  general  viev/  of  the  affairs  of  a  company  in 
receivership. 


72 


FOR^I   1 
THE   BLANK   CO^IPANY 
BALANCE   SHEET.    DECEMBER  31,    1919 


ASSETS 

CURRENT  ASSETS: 

Cash, $  2,316.25 

Not38  Receivable, 3,201.47 

Accounts  Rejeivable: 

Customers, $50, 254 .  79 

Less  Reserve  for  Losses, 1. 116.04 

Net, $49,138.75 

Others, 2.316.14  51,454.89 

United  States  Liberty  Loan  Bonds  (Market 

Value), 4,438.62 

Accrued   Interest   Receivable, 210.50 

Merchandise   Inventory    (At   Cost), 40,112.23 

Total  C\irrent   Assets, $101,  733.96 

PROPERTY: 

Land, $10, 000 .00 

Building, 15,417.95 

Furniture  and  Fixtures, 2,000.00 

Automobiles,    Horses,    and  Wagons, 3.250.45 

Total, $30,668.40 

Less  Reserve  for  Depreciation, 6,250.14 

Net  Property, 24,418.26 

DEFERRED  CHARGES: 

Unexpired  Insurance, $   234 .  79 

Taxes  Paid  in  Advance, 125.14 

Total  Deferred  Charges, 359  95 

TOTAL, $126,512.15 

LIABILITIES 

CURRENT  LIABILITIES: 

Notes  Payable, $15,000.00 

Accounts  Payable, 25,661.19 

Accrued  Taxes, 1,254.75 

Total  Current  Liabilities, $  41,915.94 

RESERVE  FOR  CONTINGENCIES, 5, 000  .00 

CAPITAL  STOCK  -  AUTHORIZED  AND  OUTSTANDING,  500  SHARES  OF 

$100.00   EACH, 50,000.00 

SURPLUS,    PER  EXHIBIT    "B", 29,596.21 

TOTAL, $126,512.15 

EXHIBIT    "A" 


73 


FORM  2 
BLANK  &  COMPANY.  INC. 
BALANCE  SHEET,  DECEMBER  31,  1919 


ASSETS 

CURRENT  ASSETS: 

Cash, $  27,391.21 

Accoiints  Receivable: 

Customers, 143,880.29 

Officers  and  Employees, 4, 242 .00 

Merchandise  Inventory, 890.60 

Total  Current  Assets, $176,404.10 

NOTES  RECEIVABLE  COVERING  SUBSCRIPTIONS  FOR  CAPITAL  STOCK  - 

DUE  ON  DEMAND  AFTER  DECEMBER  31,  1920, 11,000.00 

RIGHT  TO  RECEIVE  375  SHARES  OF  CAPITAL  STOCK  OF  A .  B. 

COMPANY, 37,  500 .00 

TREASURY  STOCK  -  REMAINDER  OF  STOCK  DONATED  FOR  SALE  TO 
PROVIDE  WORKING  CAPITAL  -  100  SHARES,  AT  ESTIMATED  SALE 

VALUE, 5, 000 .00 

FURNITURE  AND  FIXTURES, 865.24 

DEFICIT: 

Profit  and  Loss  Deficit,  per  Exhibit  "B",...  $  53,425.71 
Less: 

Proceeds  of  Sales  of  Donated 

Stock, $20, 000 .00 

Valuation  of  Unsold  Donated 

Stock, 5,000.00   25,000.00 

Net  Deficit, 28,425.71 

TOTAL, $259,195.05 

LIABILITIES 


CURRENT  LIABILITIES: 

Trade  Acceptance  Payable, $     2,618.88 

Accoxonts  Payable, 156,509.17 

Accrued  Wages, 67.00 

Total  C\irrent   Liabilities, $159,195.05 

CAPITAL   STOCK  -   AUTHORIZED  AND    ISSUED,    1,000    SHARES  OF 

$100.00   EACH, 100,000.00 

TOTAL, $259,195.05 

EXHIBIT    "A" 


»r^ 


I 


74 


FORM  3 

JOHN  DOE 

BALANCE  SHEET,  DECEMBER  31.  1919 


ASSETS 

CASH, • $  2,316.05 

ACCOUNTS  RECEIVABLE  -   CUSTOMERS, 4, 617 . 52 

ADVANCES  TO  El^LOYEES, 125.00 

LIBERTY  LOAN  BONDS   (Par  Value) , 2,000.00 

MERCHANDISE   INVENTORY, 27, 319 . 50 

STORE   SUPPLIES, 852 .  14 

STORE  AND  OFFICE  EQUIPMENT, 1,  525 .00 

DELIVERY  EQUIPMENT,  2,097.53 

UNEXPIRED  INSURANCE, 212.05 

TOTAL, $^1.064.79 


LIABILITIES 

NOTES  PAYABLE, $  5,000.00 

ACCOUNTS  PAYABLE, » 3, 812 .94 

CAPITAL: 

Balance,    January  1,    1919, $26,247.11 

Net  Income  for  the  year,  per  Exhibit  "B", 13.619.96 

Total, $39,867.07 

Less  Withdrawals   (Including  Salary), 7,615.22     32,251.85 

TOTAL, $41.064.79 


EXHIBIT    "A" 


: 


75 


FORM  4 
THE  BLANK  COMPAMY 
CONDENSED  BALANCE  SHEET.    DECELfflER  31.    1919 


ASSETS 

CURRENT   ASSETS: 

Cash, $     526,043.51 

United  States  Treasxiry  Certlfioates  of  Indebtedness, 

Due  March  15,  1920, 100,000.00 

Bills  Receivable, 73,974.68 

Accounts  Receivable: 

Foreign, $1,832,930.72 

Domestic, 692.527.49     2,525,458.21 

Agencies'   Balances  -  Net, 2,154,809.98 

Merchandise, 1,917,007.82 

Total  Current   Assets, $7,297,294.20 

INVESTMENT  SECURITIES, 195,854.84 

EXPENDITURES   APPLICABLE  TO  FUTURE  OPERATIONS, 74,196.71 

GOOD-WILL, "300.000.00 

TOTAL, $7,867.345.75 

LIABILITIES 

CURRENT  LIABILITIES: 

Accepted  Drafts, $  530,537.08 

Bills  Payable, 675,000.00 

Accounts  Payable, 1,530,589.21 

Dividends  Payable, 69,382.60 

Reserve  for  Taxes  (Company's  Estimate), 650.000.00 

Total  Current  Liabilities, $3,455,508.89 

DEFERRED  CREDITS, 142,317.81 

RESERVE  FOR  CONTINGENCIES, 125,000.00 

CAPITAL  STOCK: 
Preferred-  Issued  (15,000  Shares), $1,500,000.00 

Less  Held  In  Treasury, 32.500.00  $1,467,500.00 

Common  -  Issued  (15,000  Shares), $1,500,000.00 

Less  Held  In  Treasury, 174.100.00  1,325.900.00 

Total  Capital  Stock, 2,793,400.00 

SURPLUS, 1,351.119.05 

TOTAL, $7,867,345.75 

NOTE:  Contingent  liabilities  on  account  of  drafts  and  bills  negotiated 
under  bankers'  credits  against  shipments  of  merchajidise  amount 
to  approximately  $4,550,000.00. 


76 


FORM  5 
THE  BLANK  TRADING  COMPANY 
CHICAGO  BRANCH 
BALANCE   SHEET,    DECEMBER  31,    1919 


ASSETS 

CURRENT  ASSETS: 

Cash, $  35, 490 .  75 

Notes  Receivable, 16,  884 .51 

Accoiints  Receivable: 

Customers, $246,  293  .  72 

Others, 1.388.38   247,682.10 

Merchandise  Inventory,  as  Taken  and  Valued 

by  the  Company, 384,  784 .30 

Consigned  Merchandise,  at  Sales  Prices,  21, 782.80 

Total  Current  Assets, $706,624.46 

FURNITURE  AND  FIXTURES, 5,  748  .92 

DEFERRED  CHARGES: 

Advances  for  Traveling  Expenses, $    450.00 

Deposits  on  Account  of  Rent  and  Electric 

Current, 1,497.23 

Doubtful  Accounts  Receivable, 2,607.27 

Prepaid   Insurance   and  Taxes, 730.99 

.    Total  Deferred  Charges, 5.285.49 

TOTAL, $717,658.87 

LIABILITIES 

CURRENT   LIABILITIES: 

Customers'    Credit   Balances, $     2,201.47 

Sundry  Accounts  Payable, 3.561.71 

Total  Cxirrsnt   Liabilities, $     5,763.18 

THE  BLANK  TRADING   C0I.IPANY,    Um  YOPJC: 

Investment   Account, $574,922.04 

Current  Account , 135.994.72     710, 916  . 76 

DEFERRED  CREDITS, 978.93 

TOTAL, $717,658.87 


FOHU  6 

THE   BLAIIK   CJUAIIY 
BALACCZ  SHEET,    DECE.3ER  31.    1919 


ASSET 
PROPERIV,  LESS  DEPREOIATIOit  -  Schedule  #1, 
OoOD-ViILL,    PATENTS,    AilD  IRADE-ilAHKS, 


$     462,834.47 
250,000.00 


■  IIIVESTIEUT    lU   SUBSIEIAHY   COIJPAMY* : 

Capital  Stock  -   1,000  Shares   of  SIOO.OO  each,. 
AtiVdJices, 


$136,237.73 

50,000.00 

Total  Investment    In  Subeldiaxy  Company,.. 


SISKIHG  FUIID  FOR  HEDEIJPTIO!!  OF  BONDS  -    CASH   AMD   ACCRUED   111- 
TERESl    (Bonds  Deducted  from  Liability,   per  Contra), 

CURREUT   ASSETS: 

Cash  -  Current   Funds 

Ca3h  on  Deposit   to  Pay   Interest   and  DlvldenQS, . 

Salesmen's  T.'orking  Funds, 

Trade  Ucteo   and  Acceptances  Receivable, 

Accountii  Receivable: 

Tr.ide  Debtors, $261,404.06 

LesB   ue^ervea: 

~l-coujii.3 $13,386.31 

Coubtful   Accounts,..      10.326.42       23.712.73 

Accounts  Receivable  -  Officers   and  Elnployeee, . . 

marketable  Securities  -   Schedule  #2, 

Accrued  Interest  Receivable, 

Inventories: 

Flnls.red  Goods $205,042.36 

V.ork   in  Process! 102,193.14 

liaterials  and  Supplies, 180.269.60 

Advances   on  Materials   Purchased, 


$  97,526.06 

12,324.97 

3,422.95 

143,212.57 


237,691.33 

34,778.67 

556,183.00 

7,981.07 


487,505.30 
24,967.04 


Total  Current   Assets, 1,605,592.96 

DEFER.'iED  CHARGES: 

Unamortized  Discount   on  Bonds, $  24,516.29 

Prepaid  Insurance,    Interest,    and  Taxes, 6,235.24 

Experimental  Expenses 16.294.06 


Total  Deferred  Charges, . 


LIABILITIES 

PREFERREC   CAPITAL  STOCK,    8f^,    CU;.MLATIVE  -   AUTHORIZED,    3,000 
SHARES  OF  $100.00  EACH;    OUISIa;IDIHG,    2,500  SHARES, $ 

COIEJOH  CAPITAL  STOCK  -  AUTHORIZED  AND  OUTSTANDISO     10  000 

SHARES   OF  $100.00  EACH, i 

FIRST  LIORIGAGE,    6'5  BOUDS,    DUE   1934: 

lasued, $500,000.00 

Less: 

In  Sinking  Funa, $  50,00C.CC 

In  Treasury  -  Pledged  to  Secure 

Notes   Payable,  .  .' 175.000.00     225.000.00 


250,000.00 
,000,000.00 


Outstanding, 


CURREUT    LIABILITIES: 

notes   Payable  -  Loans, $100,000.00 

Trade   Acceptances  Payable, 190,776.64 

Accoonts   Payable, 248,729.57 

Interest   and  Dlvidendfl  Payable, 12,324.97 

Accrued  Accoiints: 

Income  and  Excess  Profits  Taxes   (Estimated),.  40,000.00 

VTages, 13,069.17 

Interest , 3.762.43 


DEFERRED  CREDIT 


Total  Current  Liabilities, 

FIRE   INSURANCE  SUSPENSE 


RESERVES; 

Injuries  and  Damages, $     8,250.27 

Contingencies, 25.000.00 


Total  Reserves, 


SOHPLOS  FROU  REVALUATION  OF  GOOD-ltlLL,    PATENTS,    AND  TRADE- 
MARKS,   

PROFIT  AND  LOSS  SURPLUS: 

Balance,   January   1,    1919, $  85,743.63 

Surplus  for  the  Year, 220.525.34 

Total, $303,269.02 

Less  Dividends, 120.000.00 


Balance,   December  31,    1919, 


275,000.00 


608,662.78 
5,491.64 


33,250.27 
200,000.00 


186.269.02 


TOTAL, $2,558,673.71 


TOTAL, $2.558.673.71 


*       Should  be  named. 

NOTE:  The  Company  hao  contingent  liabilities  of  $109,326.73 
on  account  of  notes  and  acceptances  receivable  dis- 
counted. 


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81 


FORM  9 

JOHN  DOE  &  COMPANY 

BALANCE  SHEET  AT  CLOSE  OF  BUSINESS,  DECEMBER  31,  1919 

ASSETS 

CASH  ON  DEPOSIT, $       ^^'tll'l^ 

CASH  ON  HAND, t^^'il 

FEDERAL  ANL   STATE   TAX   STAMPS, .  or^   Jaa   Jo 

'  SECURITIES  BORROWED, ,?X' tS2   nS 

SECURITIES   SOLD  AND  UNDELIVERED, HO,  535  .90 

•  CUSTOMERS'    DEBIT   BALANCES   -   SECURED,  2,018,245.67 

'  CUSTOMERS'    DEBIT   BALANCES   -   UNSECURED, ■^''?,^l'^} 

BROKERS'    LONG  ACCOUNTS, °^t'??n*Tt 

.  COMiaSSlONS  RECEIVABLE, -.oJ';^?    oq 

:  SECURITIES  OWNED, fj' tS^'fo 

i  SYNDICATE  PARTICIPATIONS, S   '?5I*i5 

EXCHANGE  MEMBERSHIPS, ^?'  522  'So 

,  FURNITURE  AND  FIXTURES, 1»  725.00 

PARTNERS'    TRADING  ACCOUNTS: 

John  Doe, $23,385.21 

Richard  Roe, 34,540.13  57.925.34 

TOTAL, $3.385.244.86 

LIABILITIES 

LOANS  PAYABLE, $2, 300, 000  .00 

,  SECURITIES  LOANED, 1^6,  500  .00 

:  SECURITIES  BOUGHT  AND  NOT  RECEIVED, 47,365.00 

'  SECURITIES  SHORT, 11,337.50 

CUSTOMERS  '    CREDIT  BALANCES, 68,963.65 

CUSTOMERS'    SHORT  BALANCES, 227,447.47 

i  BROKERS'    SHORT  ACCOUNTS, 102, 680  .00 

'  ACCRUED   INTEREST  PAYABLE, 8,  816  .36 

;  DIVIDENDS  PAYABLE  -  NET, 4, 326 .37 

'l  CAPITAL: 

Investment   Accounts: 

John  Doe, $300,000.00 

Richard  Roe, 100,000.00 

Undivided  Profits, 72.916.57 

Total, $472,916.57 

j       Less  Personal  Accovmt,    John  Doe, 5.108.06  467.808.51 


\\ 


TOTAL, $3,385,244.86 


i 


82 


FORM  10 

THE  BLANK   COMPANY 
BALANCE  SHEET,    DECEMBER  31.    1919   and  1918,    AND  CO;.:PA?.ISo:: 


DECEI3ER  31, IIICREASE 

1919  191b  ♦DECREASE 


ASSETS 

:  CURRENT   ASSETS: 

Cash, $     2,316.25  $      1,568.47      $        747.78 

Notes  Receivable, 3,201.47  'i, 013. 01*          811.54 

Accounts  Receivable: 

Customers,    Less  Reserve   for  Losses   (1919, 

$1,116.04;      1918,    $500.00), 49,138.75  42,517.96          6,620.79 

Others, 2,316.14  1,060.00          1,256.14 

United  States  Liberty  Loan  Bonds   (Mcirket  Value, 

1919;      Par  Value,    1918), 4,438.62  2,000.00          2,438.62 

Accrued  Interest  Receivable, 210.50  156.47                54.03 

Merchandise   Inventory   (At   Cost), 40.112.23  32.550.29          7.561.94 

Total  Current   Assets, $101,733.96  $  83,866.20     $17   867.76 

PROPERTY: ' 

Land, $   10,000.00  $  10,000.00 

Building, 15,417.95  15,016.49      $        401.46 

Furniture   and  Fixtures, 2,000.00  1,924.25                75,75 

Automobiles,   Horses,    and  Wagons, 3.250.45  2.116.92          1,133.53 

Total, $  30,668.40  $  29,057.66      $   1,610.74 

Less  Reserve   for  Depreclat Ion, 6.250.14  4.219.27          2.030.87 

Net   Property, $  24  418.26  $  24,838.39   *$        420.13 

DEFERRED  CHARGES: 

Unexpired  Insurance, $         234.79  $          167.14     $         67.65 

Taxes   Paid  in  Advance, 125.14  112.01                13.13 

Interest  Paid  in  Advance, 196.50   *          196.50 

Total  Deferred  Charges, $         359.93  $         475.65   *$        115.72 

TOTAL, $126,512.15  $109,180.24      $17.331.91 

LIABILITIES 

CURRENT   LIABILITIES: 

Notes   Payable, $  15,000.00  $  20,000.00  ♦$  5,000.00 

Account 8  Payable, 25,661.19  23,516.29          2,144.90 

Accrued  Taxes , 1.254.75 514.68 740.07 

Total  Current   Llabilitiea, . .  $  41,915.94  $  44,030.97   ♦$  2.115.03 

RESERVE   FOR  CONTINGEIICIES, 5,000.00  5  000  00 

CAPITAL  STOCK    (Shares    $100.00  Each), 50,000.00  45,000.00          5*000.00 

SURPLUS,    PER  EXHIBIT    "B", 29,596.21  20.149.27          9!446.94 

TOTAL, $126,512.15  $109,180.24      $17.331.91 

•   Typed  in  Red. 
EXHIBIT    "A" 


11 


IKE  BLAIIX  COiMPACT 
BALAIICE  SHEET,    DECELSa  31,    1919,    AilD  COISARISOII  TTITH  DECE:3EPl  51,    1916 


83 


—   ASSETS-- 


DECEMBER  31, 
IS  19 


I'.JCHEASE 
•DECREASE 


—  L  I   A  : 


I    I.  I   I   I   E  S 


DECELBER  31, 
1S19 


IltCREASE 
•DECREASE 


PROPERTY,    LESS  RESERVES  FOR  DEPRECIATION  - 

Schedule  #1 $     462.834.47 

OOOD-WILL,    PATENTS,    AJID  TRADE-MARKS, $     aSO.OOOTOO 

IHVESTMEBT    III  SUBSIDIARY  OOUPAIIY:'^ 

Capital  Stook  -  1,000  Shares   of  $100.00  Eaoh,...  $     136,237.73 

Advanoea , 50.000.00     $  10.000.00 

Total   Investment   In  Subsidiary  Com- 
pany,    S      1B6.237.73 

SIKXIKO  FUND  CASH  AND   ACCRUED   INTEREST, $  4. 96^794 

CURRIKT  ASSETS: 

Cash  -  Current  Funds $       97,526.06     $  28,542.44 

Cash  on  Deposit  to  Pay   Interest   and  Dividends,..  12,324.97  376.01 

Salesmen's  Working  Funds, 3,422.95  222.95 

Notes  and  Aoooptanoes  Receivable, 143,212.57         24,142.07 

Aocounts  Receivable  -  Trade  Debtors   (Less  Re- 
serves  for  Discounts,    $13,386.31,   and  for 

Doubtful  Accounts,    $10,323.42), 237,691.33 

Accounts  Receivable  -  Officers  and  Enployees, . . .  34,778.67 

liirketable  Securities  -  Scheduls  #2, 556,183.00 

Accrued  Interest  Receivable, 7,981.07 

Inventories: 

Finished  Goods. 205,042.36 

Kork  in  Process 102,193.14 

tiaterials  and  Supplies , 180, 269 .80 

Advances  on  llaterials  Purchased, 24.967.04 

Total  Current   Assets, $1.605,592.96 

DEFERRED  CHARGES: 

Unamortized  Discount  on  Bonds, $       24,516.29 

Prepaid  Insurance,    Interest,    and  Taxes, 8,235.24 

Experimental  Expenses , 16.294.06 

Total  Deferred  Charges, $       49,045.61 


$  34.783.54 


10.000.00 
2.364.96 


10,122.47 

•        5,620.34 

10,500.00 

1,054.23 

67,505.22 
20,114.95 
45,327.56 
24.967.04 
$236,254.60 

$     1,519.12 

792.05 

12.150.43 

$  14,461.60 


TOTAL, $2.558.673.71      $293,134.76 


PREFERRED  CAPITAL  STOCK  -  S(=,    CUUILATIVE 

(Authorized,   3,000  Shares  of  $100.00  Each;     Out- 
standing,   2,500  Shares), $     250.000.00 

COIIUON  CAPITAL  STOCK  (Authorized  and  Outstanding, 

10,000  Shares   of  $100.00  Each), $1,000,000.00 

FIRST  MORTGAGE,    6;*.  BONDS,    DUE  1934: 

Issued, $     500,000.00 

Less: 

In  Sinking  Fund, $       50,000.00     $     7,000.00 

In  Treasury  -  Pledged  to  Secure  llctes  Payable,  175.000.00 

Total, $      225,000.00      $     7.000.00 

Outstanding, $     275.000.00  •$     7iooo.OQ 

CURRENT   LIABILITIES: 

Notes   Payable  -  Loans, $     100,000.00  •$25,000,00 

Trade  Acceptances  Payable, 190,776.64         75,122.68 

Accounts   Payable, 248,729.57       107,250.74 

Interest  and  Dividends  Payable 12,324.97               376.01 

Accrued  Accounts: 

Income  and  Excess  Profits  Taxes   (Estimated),..  40,000.00         25,000.00 

tlages, 13,069.17     1,201.92 

Interest , 3.762.43  •     576.22 

Total  Current  Liabilities, $  606 j 662. 78  $183.375.13 

DEFERRED  CREDIT  -  FIRE  INSURANCE  SUSPENSE, 5    5*451. &4   $  S;491.64 

RESERVES :  

Injuries  and  Damages, $         8,250.27     $         742.67 

Contingencies, 25.000.00         10.000.00 

Total  Reserves , $       33^250.27     $  10^742.67 

SURPLUS   FROLl  REVALUATION  OF  GOOD-KILL,    PATENTS, 

AND  TRADE-llAHKS, $     200.000.00 

PROFIT   A;ID   LOSS  SURPLUS: 

Balance  at  Beginning  of  the  Year, $       65,743.68     $  35,617.73 

Surplus   for   the  Year, 220.525.34       114.907.61 

Total, $     306,269.02      $150,525.34 

Less  Dividends , 120.000.00         50.000.00 

Balance  at  End  of  the  Year $     186,269.02     $100,525.54 

TOTAL, $2,558,673.71     $293,134.78 


Typed  in  Red. 
Should  be  Named. 


NOTE:        The   Company  has  Undetermined  Liabilities  on  Account  of  Unreported  Drafts  Drawn 
by  its  European  Agent   for  Purchases   of  Merchandise  Under  Letters  of  Creait, 
the  Unused  Balances   of  V^hich  Aggregate  $100,000.00. 


84 


m 


FOKl  Ig 

THE  bla::k  pov.^r  col:paijy 

BALAilCE   SllEET.    DECE.3ER  31,    1919   JJaP   1918.    Ai.T  COMPARISOH 


ASSETS 


DECEIBER  31,    1919 


DECE.3ER  31,    1918 


INCREASE  OR   'DECREASE 


PROPERTY   AKD  PLAHT  -   Schedule   J-'l, $16    789,779.12 

i:rra:sTiiEtiTS  -  a.  s,  b.  colipauy: 

Capital  Stock, $       60,000.00 

First  Mortgage  Bonds, 20.000.00 

Total  Inveetmante  -  A.   &  B.    Company,  80,000.00 

TORXIKG  ASSETS: 

llaterlals  and  Supplies, $     187,142.13 

Advances   to  Right-of-way  Agents  and  Field  Em- 
ployees,    6,395.57 

Prepaid  Expenses : 

Insuremce, 8,387.41 

Interest, 14,521.53 

Taxes , 12.223.92 

Total  VTorklng  Assets, 

SPECIAL   DEPOSITS  CTTH  TRUSTEES; 
Guaranty  Trust  Company,   Nevj  York; 

Sinking  Fund  Cash, $  382 .48 

Cash  Available   for  Construotion, 16,618.41 

Equitable  Trust  Company,    Nev;  York  -  Trust   Funds,     

Total  Special  Deposits  with  Trustees 
CURREIIT    ASSETS: 

Cash  -  General, $     161,672.59 

Cash  on  Deposit   for  Payment  of  Matured  Funded 

Debt  and  Interest, 18.355.00 

Notes  Receivable, 224,100.00 

Acoounts  Receivable  -  Consumers, 248,542.10 

Accoiints  Receivable  -  General, 149,631.14 

United  States  Liberty  Loan  Bonds,    Less  Collec- 
tions  on  Subscriptions   by  Employees, 47,046,20 

Accrued  Interest   on  Sinking  Fund  Securities,...,  14,484.90 

Total  Current   Assets, 863,811.93 

DEFERRED  DEBIT   ITEIIS: 

Unamortized  Debt  Discount  and  Expense. $     900,093  .36 

Unamortized  Depreciation  of  Power  Plant, 11,100.00 

aisoellaneous, 17.002,74 

Total  Deferred  Debit  Items 928,196,10 

TOTAL, $1B.907.45B.60 


226,670,56 


17,000.69 


60,000.00 

292,527.97 

5,851.66 

8,138.51 

7,460.10 

12,584.50 


20.50 
15,847.26 
21,592.36 


$       30,373.03 

29,820.00 

800.00 

312,127.85 

115,076,68 

52,696.37 

11,018,05 


713,673.18 
19,500.00 
10,920.85 


$15,739,851.31 


60.000.00 


326,562.94 


37.460.12 


$       20.000.00 

•$     105,385.84 

543.71 

248.90 

7,061.43 

• 360.58 


551,911.98 


744,094.03 
$18,459,880.38 


i   49,927.81 


20,000.00 


97,892.38 


361.98 

771.15 

21.592.36 


•      20,459.23 


$     131,299.56 

•  11,455.00 
223,300,00 

•  63,585.75 
34.554,46 

•  5.550,17 
3.446,85 


$      185,420.18 

•  8,400.00 

6,081.89 


311.899.95 


184,102.07 
$447.578.22 


Typed  in  red. 


(Continued)    -   1. 


c 


:\ 


85 


FORil  12 

THE  BLANK   P0\7SR   COitPAJfY 

3ALa:ic£  sheet,  etc. 


I  ABILITIES— DECEMBER  31,  1919  DECEMBER  31,  1918  INCREASE  OR  'DECREASE 


CAPITAL  STOCK: 

Flrut  Preferred,  6fj,  Cumulative  -  25,000  Sharea 

of  £100.00  each,  . $2,500,000.00  $2,500,000.00 

Second  Preferred,  6>  Non-cumulative  -  20,000 

Shares  of  $100.00  each, 2,000,000.00  2,000,000.00 

Common  -  12,500  Sharea  of  $100.00  each, 1.250.000.00  1.250.000.00 

Total  Capital  Stock, $  5,750,000.00  $  5,750,000.00 

FBHDED  DEBT: 

First  ilortgdge,  5-;^,  CkJld  Bondb,  Due  1943, $5,000,000.00  $5,000,000.00 

Less  Kela  In  Sinking  Funa, 1.113.000.00  933.000.00  $  180.000.00 

Outstanding, ^ $3,667,000.00  $4,067.000700  ♦$   160,000. 60 

••Underlying  Company  First  Mortgage,  5>  Bonos,  Due  

1950, $5,000,000.00  $5,000,000.00 

Less  Held  in  Sinking  Fund, . .  .  .- 227.000.00  162.000.00  $       65,000.00 

Outstanding,.^ $4.775i000.00  $4.838.000.00  •$        65.000.00 

Refunding  Mortgage,    6fj,    Sinking  Fund.    Gold  Bonds, 

Due  1958, $2,000,000.00  $2,000,000.00 

Less  Held  by  Trustee  to  Secure  T-.vo-year,  Gold 

Notes, 2.000.000.00  •$2.000.000.00 

Outdtanding, $2 ,  OOP .  000 .  00  Nil  |2 ,  000 .  OOP .  00 

Two-year,   6f?,   Convertible,    Gold  Notes,    Oue   1919,     $1.000.000.00  *$1.000,000.00 

Total   Funded  Debt, 10,660,000.00  9,905,PP0.00  $755,000.00 

CONTRACT   OF  PURCHASE  -    STEAl.!  PLA;;T    (Payable    at    the 

Rate   of  $15,000.00  Per   Annum), 144,075.00  159,075.00  •      15  000  00 

CURRENT   LIABILITIES: 

Notes   Payable, $     826,200.00  $     735,884.56  $       90,315.44 

Accounts   Payable, 221,721.67  481,372.84  •       259,651.17 

lUtured  Two-year,   6f»,   Gold  Notes, 3,000.00  3,000.00 

»;atured  Interest   on  Funded  Debt. 15,355.00  29,820.00  •         14,465.00 

Accrued  Interest, 197,224.17  171,736.64  25,487.53 

Accrued  Taxes, 39.152.51  34,614.17  4.536.34 

Total  Current   Liabilities, 1,302,653.35  1,453,423.21  •   150,774.86 

DEFERRED  CREDIT  ITEIIS: 

Unearned  Land  Rentals, $         4,654.31  $         3,090.65  $         1,563.66 

Unexpenaea  Portion  of  Insurance  Reoeivsa, 11.500.04  36.365.34  •         25.065.30 

Total  Deferred  Credit    Items,..  15,954.35  39,455.99  •     23,501.64 

RESERVES: 

Dei-reclation, $      351,328.83  $      265,553.33  $        85,775.50 

Injuries  and  Damages, 4,848.00  2,103.93  2,744.07 

Legal  Expenses, 4,597.19  5,319.55  •  722.36 

I^ublful   Accounts, 18.925.10  18.575.02  350.08 

Total   Reserves, 379,699.12  291,551.83  88,147.29 

SURPLUS, 655,076.78  861,369.35  •   206.292.57 

TOTAL, $18,807.458.60  $18.459,880.38  $447.578.22 

•     Typed  In  red. 
••      Should  be  named. 

NOTE:      The  Company  has   a  contingent   liability  as    guarantor   of  principal  and  in- 
terest  on  $300,000.00  First  I.:ortgage,   S'o  Bonds   of  A.    4  B.    Company, 
$480,000.00  of  which  are  held  by   the  public.  (Concluded)    -  2. 


c 


86 


FORM  13 

THE  BLANK  MANUFACTURIHG  COMPANY 

STATEMENT  OF  FINANCIAL  CONDITION.  DECELIBER  31.  1919 


!URRENT  ASSETS: 

Cash, $   57,860.21 

Trade  Notes  and  Aooeptances  Receivable, 81,239.44 

Customers'  Accounts  ^Less  Reserve  for  Losses), 216,115.42 

Other  Accounts  Receivable  and  Accrued  Interest, 10,812.53 

United  States  Liberty  Loan  Bonds  and  War  Savings  Certificates  (at 

Market  Value), 74,492.00 

Inventories  (at  Cost): 

Finished  Goods, $  294,312.01 

Work  in  Process, 116,139.15 

Materials  and  Supplies, 145.487.48    555.938.64 

Total  Current  Assets, $  996,458.24 

CURRENT  LIABILITIES: 

Notes  Payable  -  Loans, $  175,000.00 

Trade  Acceptances  Payable, 96,214.09 

Accounts  Payable, 255,498.96 

Accrued  Income  and  Excess  Profits  Taxes, 48,127.25 

Accrued  Interest,  Etc., 3,510.23 

Total  Current  Liabilities, 578.350.53 

NET  CURRENT  ASSETS, $  418, 107 . 71 

INVESTMENTS  IK  CAPITAL  STOCKS  OF  OTHER  COMPAI'IIES, 74,516.92 

PROPERTY, ' $  714,189.56 

Less: 

Mortgage,  Due  1926, $250,000.00 

Reserves  for  Depreciation, 149,648.05    399,648.05    314,541.51 

NET  TANGIBLE  ASSETS, $  807,166.14 

PATENTS,  TRADE-MARKS,  AND  GOOD-UILL  (Less  Reserve  for  Amortization)  843,487.48 

EXPENDITURES  APPLICABLE  TO  FUTURE  OPERATIONS, 13.619.39 

TOTAL  NET  ASSETS  -  SHAREHOLDERS '  CAPITAL, $1,664,273.01 

REPRESENTED  BY: 

Preferred  Capital  Stock,  %   Cumulative  -  3,000 

Shares,  Less  in  Treasiiry,  167  Shares, $  283,300.00 

Conmon  Capital  Stock  -  10,000  Sheires, 1,000,000.00 

Surplus: 

Balance,    January   1,    191S, $290,449.42 

Surplus    for  the   Year, *   210.354.59 

Total, $500,804.01 

Leas   Dividends   During  the   Year,.. 119,831.00  380.973.01   $1,664.273.01 

♦   After   Charging  Federal   Taxes    for  Both  of  the   Years    1918  and   1919. 


87 


FORIJ  14 

THE  BLANK  MAmFACTURIMG  COLIPANY 

STATELIENT  OF  FINANCIAL  COMDITIOII,  DECEMBER  31,  1919, 
AND  COMPARISON  WITH  DECEMBER  31,  1918 


DECEMBER  31,     INCREASE 
1919       'DECREASE 


CURRENT  ASSETS: 

Cash, $   57,860.21  $  16,321.98 

Trade  Notes  and  Aooeptances  Receivable, 81,239.44  64,017.16 

Customers'  Aooounts  (Less  Reserve  for  Losses),....  216,115.42  59,689.43 

Other  Accounts  Receivable  and  Accrued  Interest,...  10,812.53  1,216.00 
United  States  Liberty  Loan  Bonds  and  War  Savings 

Certificates  (at  Market  Value) , 74,492.00  10,456.12 

Finished  Goods  (at  Coat,  1919;  at  Cost  Less  lOfa, 

1918), 294,312.01  112,144.56 

Work  in  Process  (at  Cost), 116,139.15  30,215.95 

Llaterials  and  Supplies  (at  Cost), 145,4^7.48  37,512.01 

Total  Current  Assets, $  996,458.24  $331,573.21 

CURRENT  LIABILITIES: 

Notes  Payable  -  Loans, $  175,000.00  $100,000.00 

Trade  Notes  and  Acceptances  Payable, (a)   96,214.09  •   13,129.14 

Acooxints  Payable, 255,498.96  97,009.54 

Accrued  Federal  Taxes , 48, 127  .25  48, 127  .25 

Accrued  Interest ,  Etc . , 3,510.23 926.54 

Total  Current  Liabilities, $  578,350.53  $232.934.19 

NET  CURRENT  ASSETS, $  418,107.71  $98,639.02 

IIIVESTMENTS  IN  CAPITAL  STOCKS  OF  OTHER  COMPANIES,...  74,516.92 

PROPERTY  (Less  Mortgage,  Due  1926,  $250,000.00,  £Uid 

Reserves  for  Depreciation) , 314,541.51  *   7,416.12 

rnST  TANGIBLE  ASSETS, $   807,166.14  $91,222.90 

PATENTS,  TRADE-MARKS,  AND  GOOD-WILL  (Less  Reserve 

for  Amortization) , 843,487.48  ♦   7,500.00 

EXPENDITURES  APPLICABLE  TO  FUTURE  OPERATIONS, 15,619.39  3,500.59 

TOTAL  NET  ASSETS  -  SHAREHOLDERS •  CAPITAL, $1,664,273.01  $  87,223.59 

REPRESENTED  BY: 

Preferred  Capital  Stock,  7fs  Cumulative  -  3,000 
Shares,  Less  Treasury  Stock  (167  Shares,  1919; 

134  Shares,  1918) , $  283.300.00  *$  3.300.00 

Common  Capital  Stock  -  10,000  Shares, $1,000,000.00 

Surplus : 

Balance  at  Beginning  of  the  Year, $     290,449.42  $  14,650.22 

S\irplus   for   the  Year , (  b)   210.354.59  75.642.37 

Total, $      500,804.01  $  90,292.59 

Less  Dividends  During  the  Year, 119.831.00  *            231.00 

Balance  at  End  of  the  Year, $     380,973.01  $  90,525.59 

TOTAL, $1,664,273.01  $   87,223.59 

*     Typed  in  red. 

a)  All  acceptances   in  1919. 

b)  After  charging  Federal  taxes   for  both  of  the  yaaxa   1918  and  1919. 


[ 


se 


HORTH  4   SOUTH  RAIUtOAD 
JOHU  DOE.    RECEIVER 

STATEMENT  OF  FINAUCIAL   COIIDITIOK,    DECE:mEH  31,    1919, 
CONSOLIDATIllG  THE   ACCOUIITS  OF  IKE  RECEIVER  A:ID  THE   CORPORATIOK 


ASSETS 

BUHBHII  ASSETS: 

CoBh, 

Loans  and  Bills  RooelTable, 

Net  Balance  Receivable  from  Agents  and 

Conduotore , 

Sundry  Debtors , 

Uaterlale  and  Supplies, 


DEFERRED  ASSETS: 

working  Fund  Advanoes , $ 

Sundry  Items, 

HNADJUSTED  DEBITS, 


53,831.43 
76,369.04 

34,731.90 
28,550.00 
54.814.26 


500.00 
3^429.49 


EQUIPMENT  SUBJECT  TO   SPECIFIC   LIEHS $      159,010.00 

Lesd  Accrued  Depreciation, 52,076.55 

ROAD  AKD  EQUIPUEllT   SUBJECT   TO  USDERLYIIIG 

BOIIDS  Airo  SENERAL  LIEHS, $5,673,342.17 

Less  Accrued  Depreciation, 112  ,936.60 


$      247,516.65 

3,929.49 
40,209.03 

106,933.45 
5,560,405.57 


LIABILITIES 

CURREHT   LIABILITIES   INCURRED  BY  THE  RE- 
CEIVER: 

Loans  and  Bills  Payable, $     232,043,85 

Traffic  and  Car-Service  Balances  Pay- 
able   9,824.61 

Sundry  Creditors, 97,167.25 

Uatured  Interest  Unpaid, 5,000.00 

Accrued  Interest, 8,977.31 

Accrued  Taxes , 6,760.24 

EQUIPilEHT   :iOTES, 

UNDERLYIMG,    5fo,    GOLD  BONDS, 

GEIffiRAL  CREDITORS,    PRIOR  TO  RECEIVERSHIP: 

Loans   and  Bills    Payable, $     438,245.80 

Interest, 112,235.24 

Sundry  Creditors , 31,901.04 

FUNDED  DEBT  SUBORDINATED  TO   CLAIUS  OF 

GENERAL  CREDITORS,    AND   INTEREST   THEREON: 

General  Mortgage,   5fa,   Gold  Bonds, $2,500,000.00 

iJatured  Intereet  on  General  Mortgage 

Bonds, 452,550.00 

Unmatured  Interest  Accrued  on  General 

llortgage  Bonds, 12.916.66 

UNADJUSTED  CREDITS, 


RESIDUE  OF  THE  ESTATE: 

Amount  of  Estate  at  Appointment 
of  Receiver: 

Capital  Stock, $3,000,000.00 

Less  Profit  and  Loss 

Deficit 706.132.52 

Less: 
Deficit  from  Receiver's 

Operations  (Subject  to 

any  amounts  represent- 
ing losses  or  gains  on 

the  original  estate 

which  may  be  included)  $  89,118.12 
Interest  Accrued  on 

General  Mortgage  Bonds 

during  Receivership, . .   417.725.82 


$2,293,867.48 


506.843.94 


359,773.27 

52,643.59 

200,000.00 

582,382.08 


2,965,466.68 
11,705.03 


TOTAL, $5.956.994.19 


1.767.023.54 
$5.958.994.19 


J 


c 


69 

CHAPTZR  III 
INCQLIE  AND  PROFIT  AND  LOSS  STATELIENTS 

Statements  of  operations  are  designated  by  varioas 
titles,  such  as:   Statement  of  Income  and  Profit  and  Loss;  Sxim- 
mary  of  Income  and  Profit  and  Loss;  Statement  of  Income;  State- 
ment of  Profit  and  Loss;  Income  Account;  Profit  and  Loss  Ac- 
count; Statement  of  Income  and  Capital  Account;  Stitement  of 
Revenue  and  Expenses;  Statement  of  Income  and  Expenses;  State- 
ment of  Earnings  and  Expenses;  and  Statement  of  Operations. 
Several  of  these,  and  perhaps  others,  are  accepted  as  good 
usage  by  prominent  acco\intants.  The  choice  depends  to  some 
extent  upon  what  the  statement  embraces.   Statements  of  manu- 
facturing and  trading  businesses  usually  show  all  operations, 
including  chauiges  in  the  stirplus,  and  are  perhaps  generally 
entitled  "Statement  of  Income  and  Profit  and  Loss."   If  a 
similar  statement  is  somewhat  condensed,  that  is,  shows  only 
the  totals  of  some  major  groups,  it  may  appropriately  be 
termed  "S\immary  (or  Condensed  Statement)  of  Income  and  Profit 
and  Loss."   If  the  statement  ends  at  Net  Income,  it  should  be 
called  a  Statement  of  Income,   It  will  usually  be  supplement- 
ed by  a  Statement  of  Profit  and  Loss.  The  title,  "Statement 
of  Income  and  Capital  Account, "  is  used  when  a  statement  of 
the  Capital  aoco\int  is  appended  to  a  statement  of  income  of 
a  sole  proprietorship  or  partnership.   Such  terms  as  State- 
ment of  Revenue  and  Expenses  are  applicable  to  other  than 
commercial  enterprises. 


I 


90 

It  is  axioniatic  that  statements  of  incoDie  and  profit 
and  loss,  however  entitled,  are  for  a  period,  and  not  at  a  date; 
yet  many  statements  are  seen  headed  somewhat  as  follows:   "State- 
ment of  Income  and  Profit  and  Loss,  December  31,  1319"  -  instead 
of,  "For  the  year  ended  December  31,  1919." 

Statements  should  be  so  designed  as  to  be  readily 
understood  by  the  layman.  The  "running"  form  of  statement  is 
generally  considered  clearer  to  the  majority  of  people  than  the 
"account"  form.   The  former  is  simply  a  series  of  additions  and 
deductions,  beginning  with  the  gross  sales  or  earnings  and  end- 
ing v.'ith  the  final  balance  of  profit  and  loss;  the  latter  ex- 
hibits the  several  sections  of  the  statement  in  the  form  of  led- 
ger accounts,  bringing  down  the  respective  balances  in  bookkeep- 
ing fashion.  The  "running"  form  has  been  adopted  by  most  of  the 
prominent  accountants,  and  is  the  only  one  treated  in  this  work. 

In  the  practice  of  representative  accountants  with 
respect  to  the  preiiaration  of  statements  of  income  and  profit 
and  loss  for  a  particular  kind  of  business  there  is  little 
variation  in  the  general  form  but  considerable  variation  in  the 
detailed  treatment  of  many  items.   For  example,  depreciation, 
rent,  insurance,  and  property  taxes  are  treated  variously  as 
cost,  general  expenses,  and  income  charges;  uncollectible  ac- 
counts as  general  expanses,  income  charges,  profit  and  loss 
charges,  and  deductions  from  sales;  income  taxes  as  general 
expenses,  income  charges,  and  profit  and  loss  charges;  cash  dis- 
counts as  income  items  and  deductions  from  sales  or  purchases; 


t 


91 


shipping  and  delivery  expenses  as  cost,  selling  expenses,  and 
deductions  from  sales;  and  so  on  through  the  whole  category. 

These  differences  of  treatment  are  largely  questions 
of  accoxinting  theory,  which  are  discussed  in  many  good  books  and 
articles  on  the  subject.  Llany  of  them  are  really  debatable,  so 
that  an  accoxintant  cannot  with  good  grace  take  a  decided  stand 
one  way  or  another.  Fxirther,  it  is  very  often  necessary,  for 
practical  purposes,  for  a  professional  accountant  to  prepare 
his  report  in  accordance  with  the  accounting  system  or  publish- 
ed statements  of  his  client.   Unless  there  is  some  important 
issue  Involved  it  is  often  unwise,  for  example,  to  change  the 
classification  of  cost  accoiints,  thereby  necessitating  an  ad- 
justment of  inventory  values  or  destroying  the  co-ordination 
between  the  operating  and  balance  sheet  accounts.  Also,  it  is 
often  fo^lnd  that  the  accounts  as  kept  do  not  furnish  sufficient 
information  for  the  preparation  of  theoretically  correct  state- 
ments, and  it  is  impracticable  to  obtain  the  information  by 
analysis.   In  short,  it  is  very  often  necessary  to  sacrifice 
idealism  to  expediency. 

Following  is  a  skeleton  form  of  statement  of  income 

and  profit  and  loss  of  a  manufacturing  or  trading  corporation: 

Gross  Sales 
Deductions  from  Sales 
Net  Sales 

Cost  of  Goods  Sold 
Gross  Profit 
Selling  Expenses 
Selling  Profit 
General  Expenses 
Profit  from  Operations 
Other  Income  Credits 
Gross  Income 


I 


92 


Income  Charges 

Net  Income 

Surplus  at  beginning  of  the  Period 

Other  Profit  and  Loss  Credits 

Gross  Surplus 

Profit  and  Loss  Charges 

Surplus  at  end  of  the  Period 

The  latter  part  of  the  foregoing  is  predicated  upon 
the  assumption  that  this  statement  is  intended  to  support  one 
item  in  the  balance  sheet,  viz.,  the  surplus  at  the  end  of  the 
period  -  which,  in  the  opinion  of  the  author,  is  generally  de- 
sirable . 

It  will  be  noted  that  in  the  above  arrangement  the 

Profit  and  Loss  Charges  are  applied  to  the  accumulated  Gross 

Surplus.   It  is  equally  proper  in  many  cases,  and  preferable  in 

some,  to  arrive  at  a  svirplus  for  the  period,  arranging  the 

statement  as  follows: 

Net  Income 

Other  Profit  and  Loss  Credits 

Gross  Surplus  for  the  Period 

Profit  and  Loss  Charges 

Surplus  for  the  Period 

S\arplu3  at  beginning  of  the  Period 

S\irplus  at  end  of  the  Period 

This  may  well  be  done  unless  it  results  in  showing  a 
deficit  for  the  period,  due  to  dividends  exceeding  net  credits. 
Some  companies  are  particular  about  declaring  dividends  only 
from  the  earnings  of  the  period,  and  their  views  should,  if 
kno7m,  be  reflected  in  their  statements.  On  the  other  hand, 
it  seems  logical  in  the  majority  of  cases  to  apply  most  items 
of  profit  and  loss  credits  and  charges  to  accvimulated  surplus. 

Further  variations  of  the  form  of  statement  ajre 
shown  later  in  this  chapter. 


93 


As  virtually  all  items  entering  into  the  Profit  and 
Loss  acooxont  of  most  commercial  business  concerns  can  be  allo- 
cated to  one  of  the  general  groups  of  charges  or  credits  out- 
lined in  the  foregoing,  we  shall  proceed  to  show  what  items  are 
usually  embraced  in  each  of  these  groups. 

GROSS  SALES 

Under  this  head  appears  the  gross  business  done  - 
charges  to  customers  or  cash  sales. 

Under  conditions  different  from  the  ordinary  manu- 
facturing and  trading  business,  it  is  appropriate  to  use  some 
term  other  than  Gross  Sales.  For  example,  if,  as  a  general 
practice,  goods  are  shipped  on  approval,  the  gross  charges  to 
customers  are  better  designated  by  some  such  term  as  "Ship- 
ments Billed";  if  the  billings  represent  completed  contracts 
only,  it  is  proper  to  use  the  term  "Completed  Contracts 
Billed,"  or  if  they  represent  the  completed  portion  of  con- 
tracts, it  may  be  well  to  use  the  simple  expression  "Bills 
Rendered."  Charges  for  services,  as  distinguished  from  com- 
modities, are  usually  designated  as  Gross  Earnings  or  Revenue. 

If  th3  business  is  departmentalized,  and  one  depart- 
ment sells  to  another,  in  a  statement  relating  to  the  business 
as  a  whole  the  interdepartmental  charges  and  credits  should  be 
eliminated;  if  the  statement  is  designed  to  show  the  opera- 
tions of  each  department,  the  credits  should  be  designated  as 
transfers,  not  sales. 


94 


The  sales  may  be  classified  on  the  statement,  if  de- 
sired, in  accordance  with  the  requirements  in  each  particular 
case  -  by  classes  of  goods,  departments,  wholesale  and  retail, 
etc. 

Some  companies,  notably  producers  of  cane  sugar  and 
cotton-seed  oil,  regard  production  instead  of  sales  as  their 
revenue  or  gross  earnings.  The  result  is  the  same  if  the  inven- 
tories are  properly  valued,  but  it  appears  to  be  more  logical 
to  treat  sales  as  the  source  of  profits,  deducting  the  inven- 
tory at  the  end  of  the  period  from  cost  instead  of  adding  it  to 
sales. 

DEDUCTIONS  FROM  SALES 

Deductions  from  sales  are  usually:   returns,  allow- 
ances, trade  discoiints,  and  freight  and  express  outward.  Mere 
corrections  of  billings  should  not  be  included  in  this  group, 
but  should  be  absorbed  in  Gross  Sales. 

Trade  discounts  are  intended  to  include  quantity 
discounts,  i.e.,  discounts  granted  when  a  customer  has  pur- 
chased a  certain  quantity.   In  the  opinion  of  the  author,  cash 
discounts  allowed  to  customers  are  not  properly  treated  as  de- 
ductions from  sales,  but  should  be  classified  as  Income 
Charges,  in  the  same  general  category  as  interest.  There  are 
some  so-called  cash  discoxints,  however,  which  are  practically 
trade  discounts.   If  the  granting  of  the  discount  is  condi- 
tional entirely  upon  settlement  within  a  certain  comparatively 
short  time  it  is  a  cash  discount;  if  the  terms  are  such  that 


95 

if  settlement  is  not  made  within  the  specified  time  the  discotint 
will  be  allowed  but  interest  will  be  charged,  the  discoiont  is  a 
trade  discoxint. 

It  is  argued  by  some  that  the  giving  of  cash  discounts 
is  such  a  general  custom  that  its  practical  effect  is  to  reduce 
the  sales  prices.   The  author  has  no  objection  to  the  applica- 
tion of  this  principle  if  it  is  followed  to  its  logical  conclu- 
sion, that  is,  if  all  discounts  that  might  have  been  taken  are 
deducted  from  sales,  and  if  all  discounts  that  have  not  been 
availed  of  by  customers  are  credited  to  income.   The  same  argu- 
ments may  be  lorged  against  deducting  cash  discounts  from  pur- 
chases, with  the  additional  objection  that  where  a  cost  system, 
or  perpetual  inventory,  is  maintained,  the  reduction  of  invoice 
prices  by  the  amounts  of  cash  discounts  resulted  in  awkward  frac- 
tions in  unit  costs. 

The  theory  underlying  the  deduction  of  freight  and 
express  outward  from  sales  is  that  when  such  charges  are  pre- 
paid or  allowed  to  customers,  they  are  usually  added  to  the 
invoice  or  included  in  the  price,  more  or  less  specifically. 
There  is  usually  such  a  wide  variation  in  the  freight  rates 
as  between  the  several  points  in  the  territory  covered  that 
it  is  impossible  to  fix  a  uniform  selling  price  which  will  in- 
clude the  cost  of  delivery  to  all  points.   In  those  compara- 
tively rare  cases  where  goods  are  sold  delivered  at  a  xiniform 
price,  it  is  proper  to  treat  deliver'y  charges  as  cost  of  goods 
sold. 


96 

In  some  classss  of  business,  conunissions  paid  are  a 
direct  deduction  from  sales,  but  in  nearly  all  manufacturing  and 
trading  concerns  it  is  better  to  treat  them  as  selling  expenses, 
deductible  from  gross  profit. 

Excise  or  revenue  taxes  baaed  upon  sales  are  deductible 
directly  from  sales. 

NET  SALES 

This  item  is  simply  the  result  of  applying  the  Deduc- 
tions from  Sales  to  Gross  Sales.   In  many  cases,  where  the  de- 
ductions are  inconsequential,  the  net  sales  may  be  the  first 
item  of  the  statement.   In  cases  where  it  is  desirable  to  use 
the  term  Shipments  Billed,  instead  of  Gross  Sales,  that  is, 
where  the  goods  returned  have  not  all  been  actually  sold,  it  is 
appropriate  to  designate  this  item  as  Sales,  instead  of  Net 
Sales. 

COST  OF  GOODS  SOLD 

For  a  mercantile  business  the  cost  of  goods  sold,  or, 

as  it  is  often  called,  cost  of  sales,  comprises  the  inventory 

at  the  beginning,  plus  the  purchases  and  freight  thereon,  less 

the  inventory  at  the  end.  This  may  be  shown  in  the  statement 

in  total  only  or  in  one  of  the  following  ways: 

(1)  Pxirchases  (including  freight) 
Add  decrease  (or  deduct  in- 
crease) in  inventory 


97 

(2)    Inventory,    January   1,    1919 
Fxirchasss 
Freight 

Total 

Less  Inventory,  December  31,  1919 

The  choice  of  method  should  be  governed  by  the  ex- 
pressed or  implied  wishes  of  the  persons  primarily  interested 
as  to  the  degree  of  detail  to  be  presented  in  ths  raport. 

It  may  also  be  desirable  to  classify  the  cost,  as 
well  as  the  sales,  by  departments,  etc. 

As  to  a  manufactxiring  business,  what  constitutes  cost 
of  goods  sold  occasions  more  controversy  among  accountants,  and 
between  accoxontants  and  business  men,  than  any  other  one  sub- 
ject. This  is  due  largely  to  the  fact  that  the  cost  of  manufac- 
ture, which  is  the  principal  element,  in  most  cases  determines 
the  valuation  of  the  inventory. 

Most  of  these  varying  opinions  are  vindoubtedly  cor- 
rect under  certain  conditions.  Therefore,  such  of  the  author's 
views  on  disputed  subjects  as  are  here  enunciated  should  not  be 
construed  as  invariable  in  their  application. 

The  arnoxmt  of  detail  of  the  cost  of  a  manufacturing 
business  that  may  be  presented  in  a  statement  is  limited  only 
by  the  classification  of  accounts  or  by  the  analysis  that  may 
be  made  of  them.  Following  is  a  fairly  complete  statement  of 
the  cost  of  manufactured  goods  sold: 


^ 


I 


98 


COST  OF  MANUFACTURE: 
Materials  Gonsuxned 
Direct  Labor 
Factory  Expenses: 

Superintendent  and  Foremen 
Factory  Office  Salaries  and  Supplies 
Receiving  Department  Expenses 
Cartage  Inward  -  Estimated 
Stores  Department  Expenses 
Stock  Department  Expenses 
Janitors,  Watchmen,  and  Elevatormen 
Power,  Heat,  and  Light: 
Fuel 
Wages 

Oil,  Waste,  etc. 
Current  Purchased 
Repairs: 
Building 

Machinery  and  Equipment 
Depreciation: 
Building 

Machinery  and  Equipment 
Property  Taxes 

Ins\irance  -  Fire,  Liability,  etc. 
Rent  of  Factory  Building 
Unemployed  Time 
Inspection 
Defective  Goods 
Experimental  Expenses 
Infirmary 
Miscellaneous 

Total  Factory  Expenses 
Total  Materials,  Direct  Labor,  and 

Factory  Expenses 
Less: 

Sales  of  Scrap 

Increase  in  Inventory  of  Work  in  Process 
Total 

Total  Cost  of  Manufact\ire 

ADD  DECREASE  IN  INVENTORY  OF  FINISHED  GOODS 

MANUFACTURING  COST  OF  GOODS  SOLD 

PACKING  AND  SHIPPING  EXPENSES: 
Salaries  and  Wages 
Materials 

Cartage  Outward  -  Estimated 
Total 

COST  OF  GOODS  SOLD 


99 


In  the  foregoing  it  is  assumed  that  inward  freight, 
duty,  marine  insurance,  and  other  direct  costs  have  been  applied 
to  the  material  and  supply  accounts  affected,  but  that  the  com- 
pany does  its  ovm  carting  and  no  distribution  of  the  cost  is 
made  except  a  more  or  less  arbitrary  division  between  inward  and 
outward . 

The  statement  is  also  based  upon  the  assumption  that 
the  finished  goods  are  not  packed  until  they  are  shipped.   If, 
as  often  happens,  the  goods  are  carried  in  stock  in  the  con- 
tainers in  which  they  are  shipped,  or  they  are  not  carried  in 
stock  at  all,  but  are  shipped  as  soon  as  manufactxired,  the  major 
part  of  packing  and  shipping  expenses  should  be  classified  as 
Factory  Expenses,  and  thus  be  reflected  in  the  Cost  of  llanufac- 
ture,  whic^„  should  be  the  basis  for  valuation  of  the  inventory 
of  finished  goods.   In  such  cases  the  remainder,  representing 
shipping  expenses,  is  relatively  so  inconsequential  that  it  is 
treated  in  the  saune  way. 

The  cost  of  materials  consumed  may  be  shown  in  great- 
er detail  if  desired  -  as  to  kinds  of  material  and  as  to  pur- 
chases (net)  and  inventories  at  the  beginning  and  end  of  the 
period.   It  is  not  considered  necessary  to  show  returned  pur- 
chases as  a  separate  item  in  any  event.  The  differences  in  in- 
ventories of  work  in  process  and  finished  goods  may  also  be  de- 
tailed by  showing  in  each  case  the  inventories  at  che  beginning 
and  end.   In  the  opinion  of  the  author,  most  business  men  pre- 
fer the  condensed  form;  if  they  want  to  know  the  sunounts  of 
the  inventories  they  look  at  the  balance  sheet. 


100 


It  is  comparatively  seldom  that  the  degree  of  detail 
shown  above  would  be  given  in  a  Statement  of  Income  and  Profit 
and  Loss.  For  the  presentation  of  such  elaborate  details, 
whether  of  cost  or  expenses,  schedules  are  usually  employed, 
only  the  totals  being  shown  in  the  exhibits. 

In  some  cases  excise  or  revenue  taxes  are  properly 
treated  as  cost  of  manvif acture . 

GROSS  PROFIT 

In  statements  for  manufacturing  companies,  this  item 
is  sometimes  called  Manufactxiring  Profit. 

SELLING  EXPENSES 

The  items  comprised  in  this  group  are  usually  some- 
what as  follows: 

Salaries  of  Sales  Manager  and  Clerics 

Salaries  of  Salesmen 

Commissions 

Traveling 

Advertising 

Catalogues,  etc. 

Rent  of  Sales  Offices 

Postage,  Stationery,  etc. 

Telephone  and  Telegraph 

Sundry  Sales  Office  Expenses 

Miscellaneous 

GENERAL  EXPENSES 

This  group  is  often  called  Administrative  and  General 
Expenses.   It  is  intended  to  include  expenses  which  apply  to  the 
business  as  a  whole,  and  not  exclusively  to  any  one  of  its  major 
operations.  These  expenses  are  as  follows: 


101 


Salaries  of  Officers 

Salaries  of  General  Office  Clerks 

Rent  of  General  Office 

Postage,  Stationery,  and  Printing 

Telephone  and  Telegraph 

Legal 

Professional  Accounting 

Directors'   Fees 

Traveling 

Corporation  and  Capital  Stock  Taxes 

Exchange  (Domestic)  and  Collection  Charges 

Dues  and  Subscriptions 

Contributions  and  Donations 

Sundry  Office  Expenses 

I/Iiscellaneous 

The  selling  and  general  expenses  are  often  combined 
under  the  head  of  Selling  and  General  Expenses,  Operating  Ex- 
penses, or  Expenses  -  with  or  without  subsidiary  captions  - 
which  eliminates  the  item  "Selling  Profit."   If .  the  classifica- 
tion of  expenses  as  between  the  two  groups  is  sufficiently 
accurate,  it  is  usually  desirable  to  show  the  two  totals, 
whether  or  not  an  intermediate  figxire  of  profit  is  computed, 
as  the  totals  may  be  valuable  in  their  relation  to  sales  and 
prime  cost  for  statistical  purposes. 

PROFIT  FROM  OPERATIONS 

This  item  is  the  profit  from  the  regular  operations 
of  the  business,  before  deducting  the  cost  of  procuring  capi- 
tal with  which  to  operate  the  business  and  any  extraordinary 
losses  or  losses  over  which  the  management  has  had  no  control. 
There  are  many  nsunes  for  this  profit,  e.g.:  Profit  from 
Operations,  Net  Profit  from  Operations,  Profit  from  Sales, 
Net  Profit  from  Sales,  Net  Profit  on  Sales,  Income  from  Opera- 
tions, and  Operating  Income. 


102 

OTHER  INCOME  CREDITS 

The  items  to  be  grouped  under  this  caption  should 
represent  income  from  sources  other  than  the  regular  operations 
of  the  business,  including  as  such  extraneous  income  derived 
from  financial  oporations  and  considered  applicable  to  the  cur- 
rent period.   Such  items,  in  the  case  of  a  manufacturing  or  mer- 
cantile business,  may  be  as  follows: 

Cash  Discounts  on  Purchases 

Interest  on  Bonds  Owned 

Interest  on  Notes  and  Accounts  Receivable 

Interest  on  Bank  Balances 

Dividends  on  Stocks  Owned 

Net  Income  from  Real  Estate 

Profit  from  Sale  of  Temporary  Investments 

Profit  from  Foreign  Exchange 

Royalties  Received 

Commissions  Received 

Profit  from  Sale  of  Materials,  etc. 

Miscellaneous 

The  net  income  from  real  estate  is  usually  detailed 
to  the  extent  of  showing  the  total  rentals  and  total  operating 
expenses  -  including  insurance,  taxes,  and  depreciation.   In 
this  connection,  a  distinction  should  be  made  between  real 
estate  held  for  investment  (including  any  that  may  have  been 
acquired  in  settlement  of  debts)  and  property  which  is  essen- 
tial to  the  operation  of  the  business  although  not  part  of  the 
plant  itself.   In  the  latter  class  are  the  tenant  houses  of  a 
mining  or  raaniofacturing  company,  which  must  be  maintained  to 
house  employees.  While  there  can  be  no  objection  to  treating 
a  net  income  from  the  rentals  of  such  property  as  an  Income 
Credit,  it  appears  that  any  loss  should  be  treated  as  an  element 
of  cost  of  production. 


103 


INCOME  CHARGES 

Under  this  caption  should  be  shown  charges  represent- 
ing the  cost  of  procuring  capital  and  losses  deductible  from 
the  income  of  the  current  period,  such  as  the  following: 

Cash  Discoxints  on  Sales 

Interest  on  Bonds 

Interest  on  Notes  and  Accounts  Payable 

Uncollectible  Notes  and  Acco\ints 

Amortization  of  Bond  Discount  and  Expense 

Loss  from  Sale  of  Temporary  Investments 

Loss  from  Foreign  Exchange 

Net  Loss  from  Real  Estate 

Amortization  of  War  Facilities 

(when  it  is  impracticable  to  charge  it  to  cost) 
Income  and  Excess  Profits  Taxes 
Miscellaneous 

Sometimes  it  is  desirable  to  exclude  from  this  group 
one  or  more  items  and  show  them  as  separate  deductions,  some- 
what as  follows: 

Net  Income  before  Charging  Interest  on 
Bonds  and  Income  and  Excess  Profits  Taxes 

Interest  on  Bonds 

Net  Income  before  Charging  Income  and  Excess 
Profits  Taxes 

Income  and  Excess  Profits  Taxes 

Net  Income 

PROFIT  AND  LOSS  CREDITS  AND  CHARGES 

These  groups  are  intended  to  provide  for  the  follow- 
ing:  extraordinary  profits  and  losses  from  the  sale  or  other 
disposal  of  capital  assets,  i.e.,  permanent  investments;  origi- 
nal capital  in  the  form  of  good-will  and  organization  expenses 
written  off;  premi\ims  and  discounts  on  the  redemption  of  capi- 
tal stock;  distribution  of  profits;  and  items  applicable  to 
the  operations  of  prior  periods.  The  latter  class  is  often 
treated  as  Surplus  Adjustments,  being  applied  to  the  Surplus 


104 
at  the  beginning  of  the  year  or  shown  separately,  but  no  advan- 
tage is  usioally  derived  from  such  separation,  as  all  the  Profit 
and  Loss  items,  with  the  exception  of  dividends,  are,  or  should 
be,  extraordinary.  In  the  preparation  of  condensed  statements, 
however,  it  is  often  convenient  to  show  the  surplus  at  the  be- 
ginning of  the  period  as  adjusted. 

There  is  a  prevailing  tendency  to  include  in  the  Profit 
and  Loss  section  charges  and  credits  as  applicable  to  prior 
periods  when  they  are  merely  "lap-overs,"  that  is,  items  which 
are  constantly  recurring  but  are  seldom  applicable  to  the  period 
dxiring  which  they  are  recorded.   The  effect  is  that  these  items 
are  never  comprehended  in  the  income  of  any  period.  The  most 
common  instances  are  taxes,  interest,  uncollectible  accounts, 
commissions,  rebates  on  sales  and  p\irchases,  legal  expenses, 
and  sxondry  adjustments  of  accruals.   In  the  opinion  of  the 
author,  all  such  items  should  be  absorbed  in  the  ctirrent  ac- 
counts for  the  year  if  practicable.  This  can  usually  be  done 
with  propriety,  except  when  the  current  year  would  be  charged 
or  credited  with  considerably  more  than  a  full  year's  propor- 
tion of  such  expenses  or  income. 

If  taxes,  for  example,  had  not  been  accrued  at  the 
beginning  of  the  year,  but  had  at  the  end  of  the  year,  it  would 
not  be  proper  to  charge  both  the  payments  and  accrual  as  ex- 
pense applicable  to  that  year.  On  the  other  hand,  if  accoxints 
receivable  are  written  off  only  when  they  are  determined  to  be 
uncollectible,  they  should  be  charged  against  the  income  of  the 


105 

period  during  which  they  were  thus  determined,  regardless  of  the 
fact  that  they  had  originated  in  prior  periods.  Minor  adjust- 
ments should  not  be  shown  in  the  Profit  and  Loss  section  unless, 
as  a  matter  of  expediency  in  the  case  of  an  audit  report,  it  is 
done  to  conform  to  the  client's  statement. 

If  income  and  excess  profits  taxes  are  not  charged  by 
means  of  accr\ials  against  the  income  to  which  they  apply,  they 
should  be  treated  as  a  charge  against  the  income  of  the  period 
during  which  they  are  paid,  as  otherwise  the  net  income  is 
always  overstated.  There  is  no  justification  for  the  treatment 
of  such  taxes  as  distributions  of  income. 

As  to  items  applicable  to  operating  accounts  of  prior 
periods,  if  it  is  impracticable  to  include  them  in  the  same  ac- 
covints  for  the  current  period,  it  is  often  well  to  show  them  as 
income  charges  or  credits,  so  that  in  any  event  they  will  be 
comprehended  in  the  net  income. 

VARIATIONS  IN  FORM  FOR  SPECIAL  PURPOSES 

It  is  sometimes  desirable  to  vary  the  form  of  state- 
ments 80  as  to  show  the  surplus  for  the  year,  or  the  accumulated 
surplus,  available  for  dividends,  deducting  the  amount  of  the 
dividends  as  a  separate  item.   The  former  arrangement  is  as  fol- 
lows: 

Net  Income 

Profit  and  Loss  Credits 

Gross  Surplus  for  the  Period 

Profit  and  Loss  Charges,  exclusive  of  Dividends 

S\irplu3  for  the  Period  Available  for  Dividends 

Dividends 


106 

Sxixplus  for  the  Period 

Surplus  at  beginning  of  the  Period 

Surplus  at  end  of  the  Period 

It  occasionally  happens  that  a  coniraercial  corporation 
sets  aside  a  certain  amount  of  profits  as  fixed  surplus,  desig- 
nating that  amount  as  S\arplus  and  the  remainder  as  Undivided 
Profits.  This  is  analogous  to  the  paid-in  surplus  of  a  finan- 
cial institution,  as  distinguished  from  its  iindivided  profits; 
and  to  the  capital  surplus  of  any  corporation,  arising  from 
valtxation  of  assets  in  excess  of  cost,  as  distinguished  from 
its  earned  or  profit  and  loss  surplus.   If  a  company  makes  a 
distinction  between  surplus  and  undivided  profits,  the  state- 
ment of  income  and  profit  and  loss  should  support  the  latter, 
and  any  appropriations  of  profits  to  increase  the  siirplus  should 
be  shown  as  profit  and  loss  charges.  Then  the  latter  part  of 
the  statement  would  appear  somewhat  as  follows: 

Het  Income 

Undivided  Profits  at  beginning  of  the  Period 

Other  Profit  and  Loss  Credits 

Total 

Profit  and  Loss  Charges 

Undivided  Profits  at  end  of  the  Period 

Similarly,  if  there  is  a  capital  surplus,  it  is  neces- 
sary to  earmark  the  surplus  from  operations,  which  is  generally 
done  by  using  the  term  Profit  and  Loss  Surplus  in  the  balance 
sheet,  and  wherever  necessary  in  the  statement  of  income  and 
profit  and  loss. 

If  dividends,  or  any  expenses  or  losses,  are  charged 
against  a  fixed  surplus,  or  if  reserves  are  used  for  any  piir- 
pose  except  that  for  which  they  were  ostensibly  created,  the 


107 

facts  should  be  reflected  in  the  statement  of  income  and  profit 
and  loss  for  the  period,  by  showing  the  amounts  in  the  profit 
and  loss  credits  as  transfers  from  fixed  surplus  or  reserves  and 
taking  up  the  charges  in  the  section  properly  affected.   The 
same  principle  applies  to  credits  to  fixed  surplus  or  reserves; 
for  example,  if  a  company  has  credited  directly  to  fixed  surplus 
or  to  a  reserve  for  depreciation  a  profit  from  the  redemption  of 
its  bonds  at  a  discount,  the  profit  and  the  provision  for  depre- 
ciation should  be  shown  in  the  statement  of  Income  and  profit 
and  loss. 

As  fully  explained  in  Chapter  I,  under  the  head  of 
Surplus,  in  the  case  of  a  partnership  or  sole  proprietorship 
the  statement  usually  ends  with  net  income,  unless  undivided 
profits  are  carried  separate  from  the  fixed  capital,  or  a  siom- 
mary  of  the  capital  account  is  added  to  the  statement.   In  the 
latter  case  the  statement  is  entitled,  "Statement  of  Income  and 
Capital  Acco\int." 

STATEMENTS  COVERING  MORE  THAN  ONE  PERIOD 

when  there  is  no  radical  change  in  the  character  of 
the  business  or  the  classification  of  accounts,  it  is  appro- 
priate for  most  businesses  to  present  comparative  statements. 
In  an  audit  report  this  may  also  be  tondertaken  if  the  accoxints 
have  been  audited  by  the  same  accountant  for  the  preceding 
period  of  the  same  duration,  \inless  it  is  known  that  compara- 
tive statements  are  not  desired  by  the  client.  Very  often 
the  client  v/ould  appreciate  comparisons  even  though  the  ac- 


loe 


covintant  might  have  to  qxialify  the  statement  with  regard  to  the 
figxires  for  the  prior  period  by  reason  of  not  having  audited  the 
accounts  for  that  period. 

A  comparative  statement  is  one  v/hich  shows  the  figures 
for  one  period  and  the  increases  and  decreases  as  compared  with 
the  figures  for  another  period,  which  may  or  may  not  themselves 
be  exhibited.  The  changes  may  be  shown  in  two  columns,  increase 
and  decrease,  or  in  one  colromn,  increases  in  black  and  decreases 
in  red.  The  latter  method  has  been  foxuid  to  be  satisfactory  in 
most  cases.   If  the  figures  for  the  prior  period  axe   shown,  the 
statement  may  be  entitled,  e.g.,  "Statement  of  Income  and  Profit 
and  Loss  for  the  Years  Ended  December  31,  1919  and  1918,  and 
Comparison."  If  the  1913  figures  are  omitted,  the  title  is 
"Statement  of  Income  and  Profit  and  Loss  for  the  Year  Ended 
December  31,  1919,  and  Comparison  with  the  Preceding  Year, "  or, 
to  use  an  odd  period,  "Statement  of  Income  smd  Profit  and  Loss 
for  the  Four  Months  Ended  December  31,  1919,  and  Comparison  with 
the  Corresponding  Period  in  the  Preceding  Year."  Most  people 
like  to  see  the  figiires  for  the  prior  period. 

Two  or  more  periods  may  be  shown  in  a  statement  with- 
out its  being  comparative  in  the  sense  employed  here,  even 
though  the  sole  purpose  of  exhibiting  the  figxires  for  the  prior 
periods  is  to  show  their  relation  to  those  of  the  current 
period.   Such  a  statement,  for  three  psriods,  might  be  entitled 
"Statement  of  Income  and  Profit  and  Loss  for  the  Years  Ended 
December  31,  1919,  1918,  and  1917." 


109 

In  the  preparation  of  a  statement  covering  two  or  more 
periods,  vvith  or  without  comparison,  when  the  primary  interest 
la  in  the  latest  period,  that  period  should  be  at  the  left  and 
the  most  remote  at  the  right,  as  indicated  in  the  above  title. 
When  the  periods  appear  to  be  equally  important,  it  seems  logical 
to  arrange  the  columns  in  the  reverse  order,  the  earliest  period 
at  the  left . 

VThen  the  figures  for  the  latest  period  are  of  primary 
interest,  as  they  usually  are,  effect  should  be  given  to  any 
changes  in  the  classification  of  accoxints  or  in  other  conditions 
which  are  reflected  in  the  latest  figures  by  adjusting  the 
figures  for  the  prior  period  or  periods  in  accordance  v/ith  the 
changed  conditions,  so  as  to  present  a  true  comparison.   In 
regular  periodical  audit  reports  this  adjustment  of  prior 
figures  should  not  extend  to  changing  the  surplus  at  the  end  of 
the  prior  period,  but  it  is  often  desirable  to  do  so  in  special 
statements  for  the  purpose  of  applying  surplus  adjustments  of 
one  period  to  the  proper  accounts  of  the  periods  actually  af- 
fected. 

It  is  sometimes  desirable  to  show  the  percentages  of 
increase  or  decrease  as  compared  with  the  preceding  period. 
When  this  information  is  given  it  is  generally  in  addition  to 
the  amounts  of  increases  or  decreases,  and  is  shown  in  a  column 
or  columns  parallel  to  those  amounts.  The  arrangement  of  the 
column  headings  is  usually  somewhat  as  follows: 


110 


Year  Ended  December  31, 
1919       1918 

♦Typed  in  red. 


Incrsase  or  ♦Decrease 
Amount      P^r  Cent 


vvnen  an  examination  has  been  made  for,  say,  three 
years,  and  the  statement  shows  each  of  the  years  and  the  total, 
it  may  be  called,  e.g.,  "Statement  of  Income  and  Profit  and 
Loss  for  the  Three  Years  Ended  December  31,  1919."   If  the  state- 
ment covers  the  period  from  July  1,  1917,  to  December  31,  1919, 
and  also  exhibits  the  average  per  annum,  it  may  be  entitled 
"Statement  of  Income  and  Profit  and  Loss,  by  Periods,  from  July 
1,  1917,  to  December  31,  1919,  and  Average  per  Annum." 

OPERATIONS  OF  DEPARTMENTS.  ETC. 

There  are  a  niMber  of  v/ays  of  showing  operations  by 
departments,  branches,  stores,  etc.   The  determining  factors 
in  the  choice  of  a  method  are  the  number  of  operating  units, 
their  relative  importance,  the  similarity  of  their  operations, 
and  the  length  to  which  the  distribution  of  expenses  and  other 
charges  is  carried. 

Brev/eries,  for  example,  generally  make  a  fairly  com- 
plete separation  between  the  operations  of  the  keg  department 
and  the  bottling  department,  down  to  net  income  or  even  to  sur- 
plus, and  the  operations  of  the  departments  are  quite  dissim- 
ilar; therefore,  it  is  appropriate  to  make  separate  statements 
dov;n  to  whatever  point  is  desired  by  the  person  for  v/hom  the 
report  is  prepared.   If  the  separation  is  made  down  to  net  in- 


Ill 

coni3,  the  ba-lances  will  be  carried  to  a  Summary  of  Profit  and 

Loss  or  to  the  balance  sheet;  if  to  surplus,  the  balances  will 

be  carried  to  the  balance  sheet,  which  will  probably  be  stated 

by  departments  as  well. 

If  the  segregation  of  operations  applies  only  to  gross 

profit,  and  there  are  not  more  than  two  or  three  departments, 

the  simplest,  and  therefore  the  best,  method  of  exhibiting  the 

operations  by  departments  is  somewhat  as  follows: 

WHOLESALE  DEPARTMENT: 
Net  Sales 

Cost  of  Goods  Sold 
Gross  Profit 

RETAIL  DEPARTMENT: 
Net  Sales: 
Cash 
Credit 
Total 
Cost  of  Goods  Sold 
Gross  Profit 

TOTAL  GROSS  PROFIT 
EXPENSES  -  etc. 
In  the  case  of  a  business  having  not  more  than  two  or 
three  departments,  where  the  distribution  to  departments  is  car- 
ried farther  than  gross  profit,  it  is  often  appropriate  to  make 
the  one  statement  columnar.   For  example,  the  operations  of  a 
public  utility  corporation  having  gas  and  electric  departments 
might  be  shown  thus: 


112 

Total     Gas    Electric 

Gross  Earnings $100, 000  $60, 000  $40,  000 

Operating  Expenses  (in  as  much  de- 
tail as  necessary) 70,000   40,000   50, 000 

Net  Earnings $  30, 000  $20,000  $10,000 

Other  Income  Credits 5.000 

Gross  Income $  35, 000 

Income  Charges 10,000 

Net  Income $  25,000 

The  foregoing  method  may  be  employed  regardless  of 
the  length  to  which  the  distribution  of  charges  and  credits  is 
carried,  if  the  items  applicable  to  the  several  departments 
are  reasonably  uniformj  but  if  there  are  a  number  of  operating 
units  it  is  usually  better  to  make  a  schedule  of  department 
operations,  usually  without  a  total  column,  carrying  the  final 
figures  to  the  exhibit  as  Gross  Profit,  Department  Profit, 
Profit  from  Operations,  or  llet  Income,  of  the  several  depart- 
ments.  Such  a  schedule  might  be  entitled  Department  Opera- 
tions, and  the  exhibit,  S\aflimary  of  Income  and  Profit  and  Loss. 
As  stated  before,  if  the  operations  are  dissimilar  it  is 
better  to  make  separate  schedules.   This  will  often  apply  if 
there  are  interdepartmental  transfers,  v>rhich  should  be  elimi- 
nated if  all  operations  are  shov;n  in  one  statement 

STATISTICS.  ETC. 

In  businesses  v/hich  produce  or  deal  in  only  one 
commodity,  or  in  which  certain  departments  are  confined  to  one 


113 

commodity,  it  is  praotically  as  important  to  state  averages  per 
unit  as  it  is  to  state  amounts.   In  that  class  are  virtually 
all  companies  deriving  their  product  from  natural  resources,  gas 
and  electric  companias,  etc.  Most  large  companies  prepare  such 
statistics  theraselv3s,  and  therefore,  the  public  accountant  is 
not  called  upon  to  do  so;  but  many  business  men  do  not  realize 
their  value  to  the  extent  of  having  them  prepared  by  their  own 
forces,  and  so  it  is  often  appropriate  for  the  professional 
auditors  to  include  them  in  their  report.   It  is  well,  hov;ever, 
not  to  devote  a  great  amount  of  time  to  such  work  without  con- 
sulting the  client,  as  computations  carried  to  considerable  de- 
tail may  not  be  considered  worth  their  cost.  Statistics  of 
this  character  are  usually  shown  in  columns  parallel  with  the 
amounts  to  which  they  relate.   They  may  represent  averages  per 
unit  produced,  or  sold,  or  both;  or,  for  example,  in  the  case 
of  transportation  companies,  averages  per  train  mile,  per  car 
mile,  per  ton  mile,  etc. 

The  same  principle  governs  regarding  ratios  relat- 
ing to  the  operations  of  commercial  businesses,  except  that 
the  ratios  are  almost  invariably  appropriate  to  some  degree. 
In  most  manufacturing  and  trading  businesses  the  executives 
are  interested  in  the  ratio  to  sales  of  the  cost,  expenses, 
and  profit;  and  perhaps  also  in  the  ratio  to  cost  of  the  ex- 
penses and  profit.   These  ratios  are  usually  shown  for  the 
totals  of  each  class  of  expenses,  unless  there  appears  to  be 
some  special  reason  for  showing  details. 


114 

Following  is  an  illustration  of   the  method  of   shelving 
such  ratios   in  a  statement    for  one  period  only: 

Net    Sales $100, 000 .00 

Cost   of  Goods   Sold 80,000.00 

Ratio   to  Net   Sales 80.00^  

Gross  Profit $  20,000.00 

Ratio   to  Net   Sales 20.00^ 

Ratio   to   Cost  of  Goods   Sold....   25.00^ 

Selling  Expenses 5,000.00 

Ratio  to  Net   Sales 5.00^ 

Ratio   to   Cost   of   Goods   Sold....      6.25f5 

Selling  Profit $   15,000.00 

General  Expenses 4,000.00 

Ratio  to  Net   Sales 4.00'^a 

Ratio   to   Cost  of   Goods   Sold S.OOfj  

Profit   from  Operations $   11,000.00 

Ratio   to  Net   Sales ll.OOf^ 

Ratio  to  Cost  of   Goods  Sold....    13.75'^ 

Other   Income  Credit s 5,000.00 

Gross   Income $  14,000.00 

Income   Charges 2,000.00 

Net    Income $  12,000.00 

The  following  illustrates  the  method  of  showing  the 
sajne  ratios  in  a  statement  covering  two  or  more  periods: 


115 


1919  1918 

Net    Sales $100,000.00  $80,000.00 

Cost  of  Goods  Sold 80,000.00  60,000.00 

Ratio   to  Net   Sales 80.00fj  75 . OOfo 

Gross  Profit $20,000.00  $20,000.00 

Ratio  to  Net   Sales 20.005a  25.00fo 

Ratio   to  Cost  of   Goods   Sold            25.00fj  33.33^5 

Selling  Expenses 5,000.00  3,000.00 

Ratio  to  Net  Sales 5.00^^  3.75^ 

Ratio  to  Cost  of  Goods  Sold      6.25^  5.00^ 


0 


Selling  Prof  it $  15,000.00  $17,000.00 

General  Expenses 4,000.00    2,000.00 

Ratio  to  Net  Sales 4.00^^       2.50^9 

Ratio  to  Cost  of  Goods  Sold      S.OOfo  ■     3 . 33fj 

Profit  from  Operations $  11,000.00  $15,000.00 

Ratio  to  Net  Sales 11.00^      18.75f« 

Ratio  to  Cost  of  Goods  Sold     13.75^      25.00^ 

Other  Income  Credits 3,000.00  2,000.00 

Gross  Income $  14,000.00  $17,000.00 

Income  Charges 2,000.00  1,000.00 

Net   Income $   12,000.00  $16,000.00 

*   *   4>   *   « 

In  an  audit  report  qxialif  ications  regarding  state- 
ments are  us\ially  expressed  in  the  comments  or  certificate,  but 
in  those  cases  where  rectification  of  the  accounts  would  effect 
a  material  difference  in  the  figures  presented,  the  qualifica- 
tion should  be  made  on  the  face  of  the  statement.  The  most 
frequent  cause  for  qualification  is  the  failure  to  provide  for 
income  and  excess  profits  taxes,  adeqxiate  depreciation,  or  ex- 
pected losses.   It  may  be  equally  desirable  to  comment  upon 


116 


exoesaive  provision  for  such  charges  or  the  linder statement  of 
earnings.  These  matters  are  usioally  covered  in  footnotes,  but 
may  in  some  cases  be  bro\ight  out  in  the  items  affected  -  for  ex- 
ample, the  sxirplus  may  be  stated  as  "before  providing  for  Federal 
taxes."  As  to  such  taxes  or  similar  items,  if  practicable,  the 
estimated  amount  should  be  included  in  the  remarks,  so  that  the 
reader  will  not  be  left  entirely  in  the  dark  as  to  the  effect  of 
their  omission  upon  the  accounts. 

Too  much  emphasis  cannot  be  laid  upon  the  necessity 
for  adapting  the  statements  to  peculiar  conditions.   It  is  sel- 
dom that  one  fonn  in  its  entirety  can  be  used  for  two  different 
businesses.  Even  in  the  same  class  of  business,  conducted 
under  the  same  general  plan,  the  classification  of  accounts  may 
be  very  different,  or  one  executive  may  not  be  interested  in  de- 
tails to  the  extent  that  another  is,  or  the  purpose  of  the  ex- 
amination may  be  different,  or  there  may  be  a  loss  instead  of  a 
profit  -  any  of  which  might  necessitate  different  treatment. 

Judicious  use  should  be  made  of  schedules  for  the  pre- 
sentation of  details  which  if  shown  in  the  exhibit  would  make 
that  statement  cumbersome  and  might  obsciire  some  major  point; 
the  same  applies  to  the  employment  of  statements  to  support 
items  of  schedules.   In  an  audit  report  it  is  appropriate  in 
many  cases  to  fiirnish  details  in  the  comments. 

It  will  occasionally  be  found  that  information  regard- 
ing operations  may  be  more  vividly  presented  in  the  chart  than 
in  the  statement  form.  This  applies  particularly  to  comparisons 


117 

of  sales,  costs,  expenses,  etc.,  between  the  several  items  and 
over  a  n\iinber  of  periods.   The  significance  of  the  comparisons  is 
impressed  upon  the  mind  more  vividly  by  means  of  the  converging 
or  diverging  curves  than  by  an  array  of  figures  or  even  percent- 
ages.  The  charts  are  also  well  adapted  to  the  exposition  of- a 
plan  of  organization  or  procedure.   However,  they  are  seldom  used 
in  audit  reports.   Their  peculiar  value  in  the  presentation  of 
operating  statistics  lies  in  their  being  kept  up  to  date  for  the 
use  of  executives.   In  other  words,  their  most  useful  purpose  is 
to  show  the  current  record  of  the  business.  The  audit  report, 
on  the  other  hand,  is  a  review  of  past  periods  and  does  not  usual- 
ly go  into  details  to  the  same  extent  that  the  internal  records 
do,  or  should.  For  this  reason,  the  subject  of  graphic  charts  is 
not  elaborated  upon  in  this  volume.  Those  wishing  to  pursue  the 
study  of  such  methods  are  referred  to  "Graphic  Methods  for  Pre- 
senting Facts,"  by  Brinton. 

*  «  *  «  « 

In  the  following  pages  are  specimen  income  and  profit 
and  loss  statements  which  have  been  designed  to  exemplify  many 
of  the  forms  in  common  usage,  and  also  to  show  the  classification 
of  items  generally  employed  in  such  cases. 

Form  16  is  a  statement  of  income  and  profit  and  loss 
of  a  manufacturing  company,  for  a  single  period,  showing  con- 
siderable detail  of  the  cost  of  goods  sold. 

Form  17  is  a  similar  statement  for  a  gas  and  electric 
company . 


118 

Form  18  is  a  statement  for  a  trading  business,  intro- 
ducing some  new  features,  including  the  manner  of  shov>ring  a  loss 
from  operations  and  a  deficit  at  the  end  of  the  periods 

Form  19  is  a  statement  for  a  contracting  company,  by 
semiannual  periods,  for  a  year,  introducing  also  the  use  of 
supporting  schedules. 

Form  20  exemplifies  a  method  of  exhibiting  the  opera- 
tions of  a  commission  and  trading  business,  in  which  certain 
statistical  information  is  shown. 

Form  21  is  a  summary  of  income  of  a  stock  brokerage 
firm,  showing  the  distribution  of  net  income. 

Form  22  is  a  statement  of  income  of  a  sola  proprietor 
in  the  retail  business,  including  a  summary  of  the  proprietor's 
capital  acco\int  for  the  period. 

Form  23  is  a  statement  of  income  and  Form  24  a  state- 
ment of  "surplus  and  deficit"  of  a  hospital. 

Form  25  is  a  comparative  siimmary  of  income  and  profit 
and  loss  of  a  manufacturing  company,  in  three  columns,  with 
several  interesting  features. 

Form  26  is  a  comparative  statement  in  which  the  cunounts 
for  the  preceding  period  are  not  shown. 

Form  27  is  a  statement  for  two  periods  and  comparison 
by  percentages. 

Form  28  is  a  statement  for  three  separate  periods. 
Some  features  of  the  classification  of  items  are  intersstinp:. 


119 

Form  29  is  a  six-column  arrangement  of  a  comparative 
statement.   The  advantages  and  disadvantages  of  this  form,  as 
compared  with  the  three-column  arrangement,  are  discussed  under 
the  head  of  Form  12,  Chapter  II, 

Form  30  is  a  statement  for  three  years  and  average 
per  annvun.   It  also  cont3.ins  some  detail  of  cost  of  goods  sold. 

Form  31  is  a  statement  of  operations  of  a  company  by 
departments,  with  eliminations.   It  is  assumed  that  the  opera- 
tions of  each  restaurant,  and  the  total  thereof,  are  shown  in 
the  supporting  schedule. 


12C 


FORM  16 

THE  BLANK  MAmJFACTURINQ  COMPANY 

STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS 
FOR  THE  YEAR  ENDED  DECEMBER  31,  1919 


GROSS  SALES, $5,693,753.29 

DEDUCTIONS  FROM  SALES: 

Returns  and  Allowances, $   96,  843  .31 

Outward  Freight, 120.225.27 

Total, 217.068.58 

NET  SALES, $5,476,687.71 

COST  OF  GOODS  SOLD: 
Manufactured  Goods: 

Materials  and  Supplies  Purchased  $2,255,875.61 

Less  Increase  in  Inventory, 193.417.62 

Materials  and  Supplies  Consvuned,  $2,062,457.99 

Inward  Freight  and  Cartage, 17,696.35 

Salaries  and  Wages, 1,718,004.09 

General  Manufactiiring  Expense,..    125,980.15 

Depreciation, 389,  543.30 

Decrease  in  Inventory  of  Work  in 

Process, 104.212.96 

Total  Cost  of  Manufacture,  $4,417,894.84 

Leas  Increase  in  Inventory  of 

Finished  Goods, 12.101.49 

Total  Manufactured 

Goods, $4, 405,  793 .35 

Purchased  Goods, 53,488.54 

Total  Cost  of  Goods  Sold, 4.459.281.89 

GROSS  PROFIT  FROM  SALES, $1,017,405.82 

SELLING  EXPENSES: 

Salaries, $  123,  745.85 

Commissions, 50,550.91 

Traveling  and  Entertainment, 24,251.13 

Advertising, 29,313.72 

General, 31.922.43 

Total, 259.784.04 

SELLING  PROFIT, I   757,621.78 

GENERAL  EXPENSES: 

Salaries, $   52,164.37 

Professional  Fees  and  Expenses,...      8,396.74 

Other, 34.347.97 

Total, 94.909.08 

NET  PROFIT  FROM  SALES  -  (Forward) , $   662,  712 .  70 

EXHIBIT  "B"  (Continued)  -  1. 


14 


121 

FORM  16 

THE  BLANK  LIANUFACTURING  COilPANY 

STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS,  ETC. 

NET  PROFIT  FROM  SALES  -  (Forward) , $  662,  712 .  70 

OTHER  INCOME  CREDITS: 

Income  from  Investments, $   16,284.41 

Other  Interest, 12,119.25 

Cash  Discoiints  on  Purchases, 11,900.23 

Miscijllaneous, 5.020.94 

Total, 45,324.83 

GROSS  INCOME, $   708,037.53 

INCOME  CHARGES: 

Provision  for  Federal  Taxes, $  200,000.00 

Cash  Discounts  on  Sales, 120,317.92 

Interest  on  Notes  Payable, 26,  707.25 

Doubtful  Accounts  Written  Off,....      7,412.72 

Miscellaneous, 19,286.29 

Total, 373.724.18 

NET  INCOME, $   334,313.35 

SLTIPLUS,  JANUARY  1,  1919, 678,250.60 

OTHER  PROFIT  AND  LOSS  CREDITS: 
Adjustments  Applicable  to  Prior 

Period, $   14,454.27 

Profit  from  Sale  of  Real  Estate,..     18.025.35 

Total, 32.479.62 

GROSS  SURPLUS, $1,045,043.57 

PROFIT  AND  LOSS  CHARGES: 

Dividends, $  300, 000 .00 

Loss  on  Machinery  Scrapped, 45,242.43 

Additional  Federal  Taxes  for  the 

Years  1913  to  1917,  inclusive, . .     75.614.91 

Total, 420.857.34 

SURPLUS,  DECEMBER  31,  1919, $  624.186.23 


EXHIBIT  "B"  (Concluded)  -  2. 


122 

FORM  17 

THE  BLANK  GAS  &  ELECTRIC  COMPANY 

STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS 
FOR  THE  YEAR  ENDED  DECEMBER  31,  1919 

OPERATING  REVENUE: 

Electric  Department, $790, 126.93 

Gas  Department , 340,323,02 

Total, $1, 130,449  .95 

OPERATING  EXPENSES  AND  TAXES: 
Electric  Department: 
Operating  Expenses: 

Production, $406,144.31 

Transmission, 23, 140.39 

Electric  Storage, 465,73 

Distribution, 24,029,18 

Utilization, 6,521.70 

,   Commerc  ial, 14, 613 .  14 

New  Business, 2,053.30 

General, 56.392,12 

Total, $533,359.87 

Ratio  to  Operating  Revenue, ... .  67.51^ 

Taxes, 20.476.54 

Total  Electric  Depart- 
ment,    $553, 836 ,41 

Ratio  to  Operating  Revenue, 70.09^  

Gas  Department: 

Operating  Expenses: 

Production, $170,349,76 

Transmission  and  Distribution, 11,677,96 

Commercial, 8, 888 .  75 

New  Business, 1, 138 ,67 

General, 20.197.72 

Total, $212,252,86 

Ratio  to  Operating  Revenue, ....   62,37^ 

Taxes, 13.106.54 

Total  Gas  Department,  . , ,  $225,359.40 

Ratio  to  Operating  Revenue, 66.22^  

Total  Operating  Expenses  and 

Taxes, 779,195.81 

Rat io  to  Operat  ing  Revenue, 68 ,94^  

OPERATING  INCOME  -  (Forward), $  351.254.14 


EXHIBIT  "B"  (Continued)  -  1. 


123 


FORM  17 

the  blank  gas  &  electric  company 

state:«ient  of  income  and  profit  and  loss,  etc. 


OPERATING  INCOME  -  (Forward),  $   351,254.14 

OTHER  INCOME  CREDITS: 

Rentals  of  Land  and  Equipment, $  15,180.72 

Electric  Merchandise  and  Jobbing  Revenue, .    2,355.03 

Profit  on  Labor  and  Materials  Sold, 342,07 

Interest  on  Bonds  in  Sinking  Fund, 4,354.05 

Interest  on  Liberty  Loan  Bonds, 832.07 

Interest  on  Notes  Receivable,  Bank  Bal- 
ances, etc., 2.319.26 

Total, 25.383.20 

GROSS   INCOME, $     376,637.34 

INCOME  CHARGES: 

Interest   on  Fimded  Debt, $127,650.98 

Interest  on  Floating  Debt, 41,981.00 

Amortization  of  Debt  Discount  and  Expense,    17,773.86 

Rent  of  Right  of  Way, 3, 289 .  50 

Rent  of  Equipment, 2.577.70 

Total, 193.273.04 

NET  INCOME,  $   183,364.30 

PROFIT  AND  LOSS  CREDITS: 

Discount  on  Bonds  Purchased  for  Sinking 

Fxind, $  6, 475 .00 

Miscellaneous  Items  Applicable  to  Prior 

Period  (Net), 2.319.05 

Total, 8.794.05 

GROSS  SURPLUS  FOR  THE  YEAR, $   192, 158.35 

PROFIT  AND  LOSS  CHARGES: 

Loss  on  Property  Retired, $  35,290.86 

Adjustment  of  Amortization  of  Debt  Dis- 
count and  Expense  -  Prior  Period, 4,824.35 

Dividends: 

Preferred  Stock, 70, 000 .00 

Common  Stock, 50,000.00 

Total, 160.115.21 

SURPLUS  FOR  THE   YEAR, ^        32,043.14 

SURPLUS,    JANUARY   1,    1919, 59,361.19 

SURPLUS,    DECEMBER  31,    1919, $        91,404.33 


EXHIBIT    "B"  (Concl\ided)   -  2. 


124 


FORM  18 

BLANK  &  COMPANY.  INC. 

STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS 
FROM  THE  DATE  OF  INCORPOPJ^TION.  JULY  6.  1919,  TO  DECEMBER  31,  1919 

GROSS  SALES, $380,240.60 

LESS  RETURNS  AND  ALLOWANCES,  574.55 

NET  SALES, $379,  666  .05 

COST  OF  GOODS  SOLD: 

Purchases, $354,  724.39 

Freight,  Drayage,  and  Express  on  Purchases, .    2.661.69 

Total, $357,386.08 

Less  Inventory,  December  31,  1919, 890.60 

Total  Cost  of  Goods  Sold, 356.495.48 

GROSS  PROFIT, $  23,170.57 

SELLING  AND  GENERAL  EXPENSES: 

Officers'  Salaries, $  14,250.00 

Salesmen's  Salaries  and  Commissions, 2,393.03 

Traveling  Expenses, 1, 376 .40 

Office  Salaries, 2, 166 .35 

Office  Rent, 1,085.00 

Stationery,    Printing,    and  Postage, 1,022.42 

Telephone  and  Telegraph, 1, 266 .  78 

Subscriptions  and  Advertising, 281.25 

Depreciation  of  Furniture  and  Fixtxires, 278.81 

Miscellaneous, 249.72 

Total, 24.369.76 

LOSS  FROM  OPERAT IONS, I      1,199.19 

INCOME  CHARGES: 

Cash  Dl scount s  on  Sales, $     2, 986 .89 

Uncollectible  Accounts, 2,  728.51 

Discounts  on  Trade  Acceptances, 266 .81 

Interest   on  Accounts  Payable, 97.35 

Settlement   on  Accoxmt  of   Inability  to  Fill 

Sales  Order, 300.00 

Total, 6,379.56 

GROSS  DEFICIT, I   7,578.75 

INCOME  CREDITS: 

Cash  Discounts  on  Purchases, $  3,332.03 

Selling  Commissions, 675.79 

Interest  on  Bank  Balances, 145.22 

Total, 4,153.04 

DEFICIT,    DECEMBER  31,    1919, $     3,425.71 


EXHIBIT    "B" 


n 


125 


FORM  19 

THE  BLAITK  CONTRACT  IIJG  COIIPAITY 

STATEMENT   OF   INCOUE   AND  PROFIT   AIID   LOSS,    BY   PERIODS, 
FOR   THE  YEAR  ENDED   APRIL  30,    1919 

SIX  MONTHS  ENDED 

APRIL  30,        OCTOBER  31, 
TOTAL  1919  1918 


IROSS  EARNINGS  ON  CONTRACTS  COLDPLETED  DUR- 
ING THE  PERIOD  -  Schedule  #1, $914,932.27      $525,690.22     $389.242.05 

I OST  OF  CONTRACTS  -  Schedule  #1, $750,553.74     $441,723.14     $308,830.60 

Leas  Excess  Charges   for  Plant  Rental 

over  Expense , 27,050.02  13,232.98  13,817.04 

Net   Coat   of  Contracts, $723,503.7^      $428,490.16      $295,013.56 

ROSS  PROFIT, $191,428.55      $   97,200.06      $   94,228.49 

ENERAL  EXPENSES: 

Officers'   and  Office  Salaries, $  26,352.14     $  14,640.08     $   11,712.06 

New  York  Office  Rent  and  Expenses, 4,624.37  2,293.72  2,330.65 

Branch  Office  Rent  and  Expenses, 266.62  69.95  196.67 

Advertising  and  Entertaining, 5,371.62  3,130.97  2,240.65 

Traveling, 1,368.93  540.42  828.51 

Taxes   (Other  than  Income  and  Excess 

Profits   Taxes), 618.67  366.61  252.06 

Insurance, 357.75  329.54  28.21 

Legal  and  Auditing  Expenses, 3,412.66  1,867.30  1,545.36 

j   Depreciation  -  Normal: 

I        Plant   Equipment, 9,573.93  5,579.03  3,994.90 

Small  Tools, 5,424.65  4,647.85  776.80 

Office   Furniture, 184.95  99.47  85.48 

1   Bonuses   to  Employees, 13,937.60  6,241.80  7,695.80 

'Donations, 648.75  420.65  228.10 

Uiscellaneous , 2.682.92  1,074.96  1,607.96 

Total, $  74.825.56     $  41,302.35     $  33,523.21 

1 
ET  PROFIT, $116,602.99     $  55,897.71     $  60,705.28 

THER  INCOLIE  CREDITS: 

Interest  on  Investments , $ 

[   Interest  on  Accounts  Receivable, 

Cash  Discounts   on  Purchases, 

Profit   on  Exchange, 

Royalt  ies , 


762 .  16 

$ 

533.37 

$ 

228.79 

299 . 14 

299.14 

196.25 

127.21 

69.04 

111.52 

66.20 

45.32 

132.87 

132.87 

Total, $      1.501.94      $      1.158.79      $  345.15 

KOSS  INCOLE  -    (Forward), $118,104.93     $57,056.50     $61,048.43 

EXHIBIT   "B"  (Continued)   -   1. 


126 


FORM  19 

THE  BLANK  CONTRACTING  COMPANY 

STATEIvIENT  OF  INCOME  AND  PROFIT  AND  LOSS,  ETC. 


•  • 


SIX  MONTHS   EIIDED 

APRIL  30,    OCTOBER  31, 
TOTAL        1919         1918 


GROSS  INCOME  -  ( Forward) , $118,104.93  $  57,056.50  $  61,048.43 

]  INCOME  CHARGES: 

Interest  on  Notes  Payable, $    485.61  $    253.59  $    232.02 

Amortization  of  Patent  -  Year  Ended 

April  30,  1919, 25,572.82    26,572.82 

Provision  for  Extraordinary  Depreciation 

on  Account  of  Abnormal  Conditions: 

Plant  Equipment, 9,573.93     9,573.93 

Small  Tools, 5,424.65     5,424.65 

Uncollectible  Accounts, 10,416.01     6,391.01     4,025.00 

Total, $  52,473.02  $  48,216.00  $  4,257.02 

NET  INCOME, $65,631.91  $  8,840.50  $56,791.41 

SURPLUS  AT  BEGINNING  OF  PERIOD, 273,116.19   275,308.63   273,116.19 

OTHER  PROFIT  AND  LOSS  CREDITS: 

Interest  on  Investments  Applicable  to 

Prior  Periods, 276.14  276.14 

Credits  on  Contracts  Applicable  to  Prior 

Periods  -  Schedule  #2, 19,677.76    11,002.07     8.675.6S 

GROSS  SURPLUS, $358,702.00  $295,151.20  $338,859.43 

PROFIT  AND  LOSS  CHARGES: 

Dividends, ' $60,000.00  $10,000.00  $50,000.00 

Cost  of  Contracts  Applicable  to  Prior 

Periods  -  Schedule  #2, 31,109.17    17,558,37    13,550.80 

Amortization  of  Patent  -  Year  Ended 

April  30,  1918, 26,572.82    26,572.82 

Total, $117,681.99  $  54,131.19  $  63,550.80 

SURPLUS  AT  END  OF  PERIOD, $241,020.01  $241,020.01  $275.308.63 

NOTE:   No  provision  has  been  made  for  Federal  Income 
amd  Excess  Profits  Taxes  for  the  year, 
which  are  estimated  at  approximately 
$10,000.00. 


EXHIBIT  "B"  (Concluded)  -  2. 


127 


FORM  20 

Tffl  TEXTILE  TRADING  COMPANY 

STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS 
FOR  THE  YEAR  ENDED  DECEMBER  51.  1919 


.NET  SALES. 


AMOUNT 


'fo     OF 
TOTAL 


GROSS  PROFIT* 

fo     OF 
AMOUNT      TOTAL 


IRADING  OPERATIONS, $  8,514,046.93 

COMMISSION  OPERATIONS: 

Mill  "A", 14,592,267.22 

Mill  "B", 3,213,754.91 

Other  Mills , 


4.7S0.819.54 


27.40  $  901,325.26  61.30 

46.97  314,674.54  21.40 

10,34  94,112.43  6.40 

15.29  160.367.06  10.90 


TOTAL, $31.070,888.60   100.00   $1,470,479.29   100.00 

$1,470,479.29 


GROSS  PROFIT,    AS  ABOVE, 

SELLING  AND  GENERAL  EXPENSES: 

Salaries, *t?? 

Brokerage .and  Commissions, 

Advertising, 

Branch  Office  Expenses , 

Insurance , 

Samples , 

Traveling, .....# 

Repairs   to  Building, 

Depreciation  of  Building, 

Depreciation  of  Furniture  and  Fixtures, 

Office  Supplies , 

Telephone  and  Telegraph, 

Postage, 

Credit  and  Collection  Expenses, 

Taxes  (Other  than  Federal  Income  and  Profits 

Taxes ) , 

Professional  Services , 

Sample  Books   and  Cases, 

Engraving  and  Lithographing, 

Miscellaneous, _ 

Total,. 

PROFIT   FROM  OPERATIONS, 

OTHER  INCOME  CREDITS: 

Interest   on  Investment  Securities, $ 

Interest  on  Mill  Accounts, 

Interest   on  Bank  Balances , 

Profit  from  Cancellation  of  Contracts, 

Miscellaneous , _ 

Total, 


166 

11 

25 

8 

5 

11 

5 

11 

5 

9 

17 

5 

5 

5 

17 

2 

3 

14 


980.41 
560.81 
842.98 
390.67 
536.00 
645.97 
818.03 
305.12 
118.70 
170.17 
448.94 
642.73 
808.05 
859.38 

193,77 
348,43 
576.33 
263.80 
001.05 


761.511.34 
^     708,967.95 


7 
21 
2 
8 
2 


547 . 15 
314.92 
868,67 
129.68 
619.04 


42.479.46 


[CROSS  INCOME  -  (Forward) , $     751,447.41 

*     Based  upon  inventory  at  cost,   before  adjustment 
to  market  values. 


EXHIBIT    "B" 


(Continued)   -  1, 


128 


FORM  20 

THE  TEXTILE   TRADING  COMPANY 

STATEMENT   OF   INCOME   AND  PROFIT   AND   LOSS,    ETC. 


GROSS  INCOME  -   (Forward) , $     751,447  .41 

INCOME  CHARGES: 

CsLSh  Dlsoounts   on  Sales, $  40,531.02 

Interest   on  Notes   Payable, 49,965.77 

Interest   on  Accounts  of  Officers   and  EiLployees, . . .  1,731.26 

Loss   from  Sale   of  Liberty  Loan  Bonds, 1,205.17 

Loss  through  Theft   of  Liberty  Loan  Bonds, 3,759.20 

Loss   in  Adjustment   of  Inventory  to  Market  Values,.  92,367.04 

Income  and  Profits  Taxes   for  the  Year   ltl8, 426.775.13 

Total, 616,334.59 

NET  INCOME, $     135,112.82 

SURPLUS,    JANUARY   1,    1919, 1,299,107.16 

OTHER  PROFIT   AND   LOSS   CREDITS: 

Proportion  of  Depreciation  of  Building  Chargeable' 

to  Surplus   from  Appreciation  of  Building, $     4,678.21 

Recovery  on  Claims,    Applicable   to  Prior  Years,....  9,401.46 

Insurance  Policies   on  Lives   of  Officers  taken  over 

by  them  at   cash  surrender  values, 3,527  .02 

Total, 17.606.69 

GROSS   SURPLUS, ; $1,451,825.67 

DIVIDENDS, 100.000.00 

SURPLUS,    DECEMBER  31,    1919, $1,351,826.67 

NOTE:      No  provision  ha^   been  made  for  Federal 
Income  and  Excess  Profits  Taxes   for 
the  year,   which  are   estimated  at   ap- 
proximately $200,000.00 


EXHIBIT    "B"  (Concluded)   -  2. 


I 


129 


FORM  21 

JOHN  DOE  &  COAIPANY 

SUMMARY  OF  INCOME 
'^FOR  THE  YEAR  ENDED  DECEAIBER  51,  1919 


INCOME: 

Commissions, $127,  576.53 

Interest  and  Carrying  Charges  -  Net, 27,444.30 

Net  Profit  on  Investasnt  Securities, 4.635.18 

Total, $159,656.06 

EXPENSES  AND  OTIiER  CHARGES: 

General  Lxpsnsea, $  59,  536.55 

Partners  '  Salaries, 20, 000 .00 

Interest  on  Partn*r*'  Capital  and  Personal 
Accoxints: 

John  Doe, $23,414.27 

Richard  Roe, 8,922.16   32,336.43 

Total, 111.872.98 

NET  INCOME, $  47,783.08 

DISTRIBUTION  OF  NET  INCOME: 

John  Doe  -  2/3, $  31,855.39 

Hicharl  Roe  -  1/3, 15,927.69  $  47,783.06 


130 


FORM  23 

JOHN  DOE 

STATEIIENT  OF  INCOME  AND  CAPITAL  ACCOUNT 
FOR  THE  YEAR  ENDED  DECEIIBER  31,  1919 

SALES: 

Cash, $75,119.24 

Oredit, 23.912.65 

Total, $99, 031 . 39 

COST   OF  GOODS   SOLD: 

Merchandise   Inventory,    January   1,    1919, $22,212.01 

Piixchases, 56,595.24 

Freight,  Express,  and  Cartage, 1,131.53 

Total, $79,938.78 

Less  Merchandise  Inventory,  December  31,  1919.  27,319.50 

Total  Cost  of  Goods  Sold, 52.619.28 

GROSS  TRADING  PROFIT, $46,412.61 

EXPENSES: 

V7ages, $11,946.27 

Rent, 3,000.00 

Salary  of  Proprietor, 6, 000 .00 

Store  Supplies, 2,627.09 

Operat  ion  of  Delivery  Cars, 1, 245 .63 

Depreciation  of  Delivery  Cars, 200 .00 

Stationery  and  Postage, 298.14 

General, 1.020.33 

Total, 26.337.46 

NET  TRADING  PROFIT, $20,075.15 

INTEREST  PAID,  ,  .  .• 427.62 

NET  INCOME,  CARRIED  TO  CAPITAL  ACCOUNT, $19,647.53 

CAPITAL  ACCOUNT 

BAUNCE,    JANUARY  1,    1919, $29,457 .06 

CREDITS: 

Salary, $   6, 000 .00 

Net    Income,    as  above, 19,  647 .  53 

Income  from  Outside    Investments, 812.49     26,460.02 

Total, $55,917.08 

CHARGES: 

Cash  Withdrawals, $12,  750 .  51 

Income   Tax  for  Year   1918, 3,212.15     15.962.66 

BALANCE,    DECEMBER  31,    1919, $39.954.42 


131 


FORM  23 
THE  BLANK  HOSPITAL 
INCOME  ACCOTOT  FOR  THE  YEAR  ENDED  APRIL  30.    1920 


HOSPITAL  REVENUE: 

Private  Room  Patients, $  59,451.55 

Ward  Pay  Patients, 43,576.93 

City  Patients, 17,626.00 

Special  Nursing, 45,834.25 

X-Ray  Service  and  Treatment, 18, 142.83 

Radixim  Treatment, 1,  275 .00 

Operating  Room  Fees, 3, 970 .00 

Out-patient  Department, 14,251.89 

Ambulance  Fees, 317.50 

Fees  from  Pupil  Nurses, 3,  725.00 

Miscellaneous, 2.762.90 

Total, $210, 933 .85 

OTHER  INCOME: 

Income  from  Investments  of  Unrestricted 

Funds, $286, 387 .39 

Donat  ions, 48, 492 .98 

Income  from  Fund  for  Educational  and 

Scientific  Work, 40,492.67 

Appropriations  from  Special  Funds  for  Stated 

Purposes, 29,  776  .45 

Rentals  of  Real  Estate,  Less  Expenses, 6,575.11 

Interest  on  Bank  Balances, 1.996.62 

Total, 413.721.22 

GROSS  INCOME, $624,655.07 

E-XPENSES: 

Administration, $  55,  731.05 

Professional  Care  of  Patients: 

Salaries  and  Wages, 96,106.21 

Medical  and  Surgical  Supplies, 35, 979 .45 

Uniforms  and  Equipment   for  Nurses, 4,  696 .50 

Out-patient  Department, 12,022.17 

Laboratories, 29,116.63 

X-Ray  Service, 14,013.31 

Ambulance, 612 .  70 

Housekeeping, 37,427.63 

Kitchen, 14,071.26 

Laui.dry, 10, 950 .23 

Steward's   Department, 147,491.42 

Educational  and  Scientific  Work, 23,807.79 

General  House  and  Property  Expenses, 95,902.14 

Corporation  Expenses, 12,398.39 

Current  Expenditures  from  Special  Funds  for 

Stated  Purposes, 9.  656.85 

Total, 599.983.73 

NET   INCOME   FOR  THE  YEAR, $   24,671.34 

EXHIBIT    "B" 


132 


FORM  24 

THE   BLANK  HOSPITAL 

SURPLUS  AND   DEFICIT   ACCOUNT 
FOR  THE   YEAR  ENDED  APRIL  30,    1920 


DEFICIT,    MAY  1,    1919, $257,048.37 

CHARGES: 

Expendltxires  for  Additions  and  Improve- 
ments Transferred  to  Capital  Account: 

Furniture  and  Fixtures, $  2,316.93 

Machinery  and  Tools, 6, 403 .09 

Apparatus  and  Instriiments, 7,421.35 

Library, 1.636.63   17, 778 .00 

Net  Loss  from  Sales  of  Investment  Secxirltles, 62,727.78 

Uncollectible  Accoiints  with  Patients  Written  Off,.      619.35 

Amount  Credited  to  Fxond  for  Educational  and 
Scientific  Work  on  Aocovint  of  Expenses  Er- 
roneously Charged  to  that  Fund  in  preceding 
year, 1.234.17 


ROSS  DEFICIT, $339,407.67 


CREDITS: 

Net  Income  for  the  Year,  per  Exhibit 

"B", $24,671.34 

Profit  from  Sale  of  Real  Estate, 14,727.87 

Unclaimed  Excess  Payments  by  Patients 

Written  Off, 212.19 

Transfer  of  Balance  of  Reserve  which 

is  no  longer  required, 6,  750.00 

Total, 46,361.40 

DEFICIT,    APRIL  30,    1920, $293,046.27 


EXHIBIT    "C" 


133 


FORM  25 

THE  BLANK  COMPAIJY 

SULiLIARY  OF  INCOME  AND  PROFIT  AND  LOSS 
FOR  THE  YEARS  ENDED  DECELIBER  31,    1919   AND   1918,    AND  COMPARISON 


.YEAR  ENDED  DECEMBER  31,..  INCREASE 

1919  1918  * DECREASE 


GROSS  SALES: 

New  York , 

Boston, 

Chicago, ^ 

Total, 

Less  Trade  Discounts,   Returns, 

Allowances ,    and  Freight , 

SET  SALES, 

30ST  OF  GOODS   SOLD, 

3R0SS  PROFIT, 

SELLING  AND   GENERAL  EXPENSES: 

New  York , 

Boston, 

Chicago , 

Total, 

JET  PROFIT, 

)THER  INCOME: 

Dividends   on  Stocks  Owned, 

Profit   from  Sale  of  Light  and  Power, 

Miscellaneous, 

Total, 

IROSS   INCOME, 

INCOLIE  CHARGES: 

Cash  Discounts  on  Sales, 

Interest  -  Net , 

Uncollect  ible  Accounts , 

Income  and  Excess  Profits  Taxes,.... 

Miscellaneous , 

Total, 

TET  INCOME, 

'ROFIT  AND  LOSS  CREDITS: 

Premium  on  Sale  of  Common  Stock,.... 

Discount   on  Purchase  of  Preferred 

Stock, 

Total, 

ROSS  SURPLUS   FOR  THE  YEAR, 

ROFIT  AND  LOSS  CHARGES  -  DIVIDENDS,  .  . 
■ROFIT  AND  LOSS  SURPLUS  FOR  THE  YEAR,  . 
ROFIT   AND   LOSS   SURPLUS   AT  BEGINNING 

OF  THE  YEAR, 

ROFIT  AND  LOSS  SURPLUS  AT  END  OF  THE 

YEAR, 

*     Typed  In  red. 


$2,622,238.55 
1,507,908.85 
2.843.764.22 


$2,280,906.72   $      341,331.83 
1,217,995.33  289,913.52 

2.398.156.11    445.608.11 

$6,973,911.62  $5,897,058.16  $1,076,853.46 


1.091.770.48 
$5,882,141.14 

4.258.727.75 
$1,623.413.39 


840.836.57 
$5,0561221.55  $ 


250.933.91 
625,919.55 


3.898.751.99  359.975. 


$1,157,469.60   $ 


465__^943 


^ 


$  354,324.76 
150,564.22 
397.228.23 

li      902.117.21 


T 


267,708.44   $ 
123,945.65 
360.875.66 
75c;.  529. 75"!" 


86,616.32 
26,618.57 
36^352.57 


$      721.296.18  $      404,939.85   $ 


149.587.46 
316,356.33 


8,250.00 
8,239.65 
4.692.01 


$ 


21  181.66 


3,750.00  $ 

6,121.12 

5.281.20* 


15^152.32 


4,500.00 
2,118.53 
589.19 


$  742:477. 64-  $  420.052717 


6.029.34 
322.385.67" 


$ 


104,827.11 

113,877.45 

14,665.61 

76,921.04 

3.604.93 


89,809.44  $ 
115,066.93* 
18,612.91* 
49,673.56 
2-.  012. 40 


428.581.70 


15,017.67 
1,189.48 
3,947.30 

27,247.48 
1.592.53 


313.896.14  S     ?75. 175.24   $     .38.720.90 


144:916.93  $    253:664.77 


$   37,500.00 
500.00 


$   37,500.00 
500.00 


38.000.00 


$ 466,581.70  $ 

235.000.00 
$     231,531.70  $ 


144,916.93 
117.500.00 


38.000.00 


321,564.77 
117.500.00 


27,416.93   $      204,164.77 


1,318,075.73      1,290,658.80  27,416.93 

$1,549,657.43  $1,318,075.73   $     231,581.70 


NOTE:      Appreciation  of  property  during  the  year  has   been  treated  aa 
Special  Surplus,    as  shown  in  Exhibit    "A". 


EXHIBIT   "B' 


FORM  26 

THE  BLANK  I^IANUFACTURING  COMPANY 

STATEMSnr  OF  INCOME  AND  PROFIT  AND  LOSS 

FOR  THE  YEAR  ENDED  DECEMBER  31,  1919, 
AND  COMPARISON  WITH  THE  PRECEDING  YEAR 


134 


YEAR  ENDED 

DECEMBER  31, 

1919 


INCREASE 
♦DECREASE 


GROSS  SALES: 

Manufactured  Goods, $2,909,713.79  $550,498.75 

Purchased  Goods, 224.317.04  *  36.312.49 

Total, $3,134,030.83  $514,186.26 

RETURNS  AND  ALLOWANCES, 267.914.93  81.328.83 

NET  SALES, $2,866,115.90  $432.85  7.43 

COST  OF  GOODS  SOLD: 

Manufactured  Goods, $2,038,609.35  $205,666.92 

Purchased  Goods, 156,329.04  *  27,012.40 

Shipping  Expenses, 49.835.82  5.835.45 

Total, $2,244.774.21  $184,489.97 

GROSS  PROFIT, : $   621,341.69  $248,367.46 

SELLING  EXPENSES: 

Advertising, $   75,625.33  $49,249.93 

Salaries, 41,809.28  5,882.27 

Commissions, 26, 112 .04  6,  899 .99 

Traveling, 9,652.43  2,129.51 

Miscellaneous, 5.329.48  *     282.99 

Total, $   158,528.56  $  63,878.71 

GENERAL  EXPENSES: 

Salaries  of  Officers, $   45,000.00 

Salaries  of  Clerks, 52,852.24*$  1,246.72 

Stationery,  Printing,  and  Postage,  7,137.13  422.84 

Telephone  and  Telegraph, 3,295.92  211.97 

Corporation  Taxes, 4,627.15*  485.75 

Legal  and  Auditing, 2,401.97*  613.75 

Contributions, 5,600.00  *   3,300.00 

Miscellaneous, 8.962.57  3.340.56 

Total, $   129,876.98  *$   1,670.85 

TOTAL  SELLING  AND  GENERAL  EXPENSES, .  $   288,405.54  $  62,207.86 

PROFIT  FROM  OPERATIONS  -  (Forward),.  $  332,936.15  $186,159.60 


Typed  in  red. 


(Continued)  -  1. 


135 


FORM  26 

THE  BLANK  MANUFACTURING  COMPANY 

STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS,  ETC. 


YEAR  ENDED 

DECEMBER  31, 

1919 


INCREASE 

♦DECREASE 


PROFIT  FROM  OPERATIONS  -  (Forward),.  $  332.936.15  $186,159.60 
OTHER  INCOME  CREDITS: 

Cash  Discounts  on  Purchases, $    6,712.91  $    593.49 

Interest  Earned, 9.026.17  *   1.204.08 

Total, I        15.739.08  *$          610.59 

GROSS   INCOME, $     348,675.23  $185,549.01 

INCOME  CHARGES: 

Income  and  Excess  Profits  Taxes,..  $   65,912.40  $  50,800.39 

Interest  on  Notes  Payable, 23.171.53  3.834.63 

Total, $   89.083.93  $  54,635.02 

NET  INCOME, I   259,591.30  $130,913.99 

SURPLUS  AT  BEGINNING  OF  THE  YEAR, . . .  1.123.587.45  *   71.322.69 

GROSS  SURPLUS, $1,383,178.75  $  59,591.30 

DIVIDENDS, 300,000.00  100,000.00 

SURPLUS  AT  END  OF  THE  YEAR, $1,083,178.75  *$  40,408.70 


Typed  in  red. 


(Concluded)  -  2. 


136 


FORM  27 

THE  BLANK  MERCANTILE  COMPANY 

STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS 
FOR  THE  YEARS  ENDED  DECEMBER  31,  1919  AND  1918, 

AND  COLIPARISON  BY  PERCENTAGES 


YEAR  ENDED  DECELIBER  31, 
1919         1918 


PERCENT- 
AGE OF 
INCREASE 
OR 
* DECREASE 


NET  SALES, $549,  637 .  10 

COST  OF  GOODS  SOLD,  302, 050 .62 

Ratio  to  Net  Sales, 55^ 

GROSS  PROFIT, $247,586,48" 

DEPARTMENT   EXPENSES:  

Salaries  and  Wages, $   88, 259  .38 

Rent, 21,  721.67 

Light  and  Heat, 2,751.61 

Delivery  and  Wrapping, 3,  517 .49 

Advertising, 19, 893 .82 

Insurance, 2,327.40 

Depreciation, 2,478.61 

Miscellaneous, .' 5,036.20 

Total, $145,986,18 

Ratio  to  Net  Sales, 27^ 

Ratio  to  Cost  of  Goods  Sold,....  48^j 

DEPARTMENT  PROFIT, $101,600.30 

GENEPlAL  EXPENSES:  

Executive  and  Office  Salaries,..  $  24,420.61 

Office  Rent, 750,00 

Stationery  and  Postage, 1,  218,07 

Telephone  and  Telegraph, 392,05 

Legal  and  Auditing, , . , .  1,256.59 

Depreciation  of  Office  Equipment  295,55 

Property  and  Capital  Stock  Taxes  2,231.00 

Miscellaneous, 3,296,55 

Total, $  33,860,42 

Ratio  to  Net  Sales, Q-'/j 

Ratio  to  Cost  of  Goods  Sold,....  Ufa 

PROFIT  FROM  OPERATIONS  -  (Forward),  $  67,739,88 


$351,060.67 
222,154.53 

$128,906,14' 


$  96,984.37 
27^ 


44^ 


K 


$  19,619.97 
6f. 


9f. 


57 

36 

*13 


92 


$  48,479,75  82 

19,820,87  10 

2,247.30  22 

2,533.92  39 

13,405.49  48 

1,446.20  61 

2,078.15  19 

6.972.69  ♦28 


50 


$  31,921.77   218 


$   12,094.67 

102 

834.07 

*10 

916.52 

33 

374.21 

5 

982.57 

28 

220.71 

34 

1,488.00 

50 

2/709.22 

22 

73 


22 


$  12,301.80   451 


Typed  in  red. 


(Continued)  -  1. 


137 


rORLI  2  7 

THE  BLANK  MERCANTILE  COMPANY 

STATEJ.IENT  OF  INCOME  AND  PROFIT  AND  LOSS,  ETC. 


YEAR  E:IDED  DECEMBER  51, 
1919 1918 

PROFIT  FROM  OPERATIONS  -  (Forward)  $  67,739.88  $  12,301.80 
OTHER  INCOME  CREDITS  -  DISCOUNT  AND 

INTEREST, 12.475.41  7,417.98 

GROSS    INCO/iE, $    80,gl5.29  $    19,  719.78 

INCOIiE   CHARGES: 

Interest, $      7,575.11  $      4,726.15 

Uncollectible  Accounts, 448.40  271.20 

Loss  from  Sale  of  Liberty  Loan 

Bonds, 328  .  20 

Income  and  Profits  Taxes, 15,121.64  2,764.29 

Total, $  23.473.35  $   7,761.64 

NET  INCOME, $  56,741.94  $  11,958.14 

SURPLUS  AT  BEGINNING  OF  THE  YEAR, .  8,045.11  4.085.97 

GROSS  SURPLUS, $  64,787.05  $  13,045.11 

DIVIDENDS, 24,000.00 8,000.00 

SURPLUS  AT  END  OF  THE  YEAR, $  40,787.05    $   8,045.11 

*  Typed  in  red. 


PERCENT- 
AGE OF 
INCREASE 
OR 

♦DECREASE 


451 

68 


307 


60 
65 


447 


202 
"374- 
97 


305 
200 


407 


(Concluded)  -  2, 


1 


138 


THE  BL, 


OMPAIJY 


SU1.C.IARY  OF   i:iC01.IE   AlTD   PROFIT  AIJD   LOSS 
FOR  THE  YEARS  EUDED  DEcaSER  31.    1919,    191S,    A:ID   1917 


YEAR  ENDED  DECEMBER  31, 

1919  1918  1917 


DEPARTUEIIT   PROFITS: 

Brewery  -   Schedule  #1. $       99,869.81  $        88,864.07  $126,026.52 

Ice   Plant   -  Schedule  #2, 16,503.26  20,748.49  19,095.37 

Bottling  Department   -  Schedule  #3, 1.268. S3 1.746.80  2.197.49 

Total, $      117,641.90  $      111,359.36  $147,319.38 

GENERAL  EXPENSES: 

Salaries   of  Officers, $        29,313.66  $       29,327.26  $28,976.58 

Directors'   Fees, 700.00  680.00  640.00 

Taxes  and  Licenses   (Not   Including 

Inoome  and  Profits  Taxes), 3,640.40  3,980.00  3,810.63 

Insurance, 487.67  314.34  299.78 

Depreciation  of  Office  Furniture  and 

Fixtures    152.04  152.03  152.04 

Miscellaneous , 475.00 581.40 325.00 

Total, $       34,768.77  $       35,035.03  $  34.204.03 

PROFIT  FROll  OPERATIONS, $   82,873.13  $   76,324.33  $113,115.35 

0T}ER  IIICOME  CREDITS: 

Net  Income  from  Investment  Real  Estate: 

Rentals , $   52,152.21  $   42,161.38  $  35,028.64 

Less: 

Repairs,  Taxes,  Insurance,  etc.,...  $    8,962.79  $    7,427.97  $  5,225.04 

Depreciation, 23.028.31 20.678.98  15.767.95 

Total, $   31.991.10  $   26.106.95  £  201992799 

Net  Income , I   20,161.11  $   14,054.43  $  14,035.65 

Interest  and  Dividends  on  Investment 

Securities, 6,196.61  3,994.51  3,146.67 

Interest  on  Notes  Receivable, 12,847.14  15,949.22  15,309.85 

Interest  on  Bank  Balances, 1,797.56  2,062.74  2,645.52 

Profit  from  Sales  of  Investment 

Securities, 103 .  76 275.00 100 .  00 

Total, $   41.106.18  $   36.335.90  $  35.237.69 

GROSS  INCOlffi, $  123,979.31  $  112,660.23  $148.353.04 

INCOME  CHARGES: 

Interest  on  Mortgages  Payable, $    1,245.39  $      621.53 

Notes  and  Accounts  Written  Off  -  Net,..      11,968.64  2,336.27  $  4,627.93 
Adjustment  of  Book  Value  of  Investment 

Real  Estate, 3,879.28  585.06 

Federal  Inoome  and  Profits  Taxes  for 

the  Preceding  Year, 22.354.67  15.092.14  12.553.19 

Total, $   35,568.70  $   21,929.22  $  17,766.18 

NET  INCOME, $   88,410.61  $   90,731.01  $130,586.^6 

SURPLUS  AT  BEGINNING  OF  THE  YEAR, 1,013,423.36  937,892.35  847,105.49 

GROSS  SURPLUS, $1,101,833.97  $1,028,423.36  $977,692.35 

DIVIDENDS  DECLARED  AND  PAID, 45,000.00 15,000.00  40,000.00 

SURPLUS  AT  END  OF  THE  YEAR, $1,056,833.97  $1,013,423.36  $937,692.35 

NOTE:  No  provision  has  been  made  for  Federal  Income  suid  Exoess 

Profits  Taxes  for  the  year  ended  December  31,  1919. 

EXHIBIT  "B" 


139 


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FORI.:  31 
THE  DLA::K  BAKSHY  &  R£STAURA;."T  CCI.a'ANY 

state.ie:it  of  ::;co:.j:  a::d  pkgfit  akd  loss, 
BY  depark.3::;ts,  for  the  six  ::oktks  eudee  april  3o^  1920 


ELIi:ii:A-  RESTAU:UKTS   - 

TOTAL  TI0;:3  BAXERY  Soheaule   #1 


SALES, $1,489,079.24  $164,517.95    $1,324, 551, 29 

TRANSFERS: 

Fooa  Supplies $585,240.84   565,240.6-4 

Crockery  and  Other  Supplies , 42.619.22   42.619.22 

TOTAL  SALES  A::D  THAIJSFERS, $1,489,079.24  $627;660.C6  $792,378.01  $1.324,561.29 

COST  a:;::  ex?e::ces: 

Food   Supplies, $      691,671.65  $585,240.84  .  $621,219  .42   $     655,695.27 

Crockery  Supplies, 27.810.93  24,017.22        22,612.14  29,216.01 

Silverware   Supplies, 2,478.09  1,7£6.14          1,201.29  3,072.94 

Storeroom  Sundries, 29,131.1'.  16,605.86        26,715.41  19,221.56 

Linen, 23,974.52  23,974.52 

Salaries  of  Managers, 29,665.54  29,585.54 

V.ages, 203,143.71  63,017.52  140,126.19 

Rent  (Less  Rental  from  Sub-tenants), .. .  68,629.51  3,000.00  65,629.51 

Advertising, 6,092.50  1,525.00  4,567.50 

Heat,  Light,  and  Power, 44,903.86  14,274.18  30,629.66 

V.ater 5,654.74  1,428.43  4,226.31 

Refrigeration, 11,042.02  306.66  10,735.34 

Laundry, 14,341.89  1,219.24  13,122;65 

Telephone  Service, 2,360.08  238.58  2,121.40 

Insurance, 5,285.94  2,573.75  2,712.19 

Repairs, 19,276.07  3,133.29  16,142.76 

Depreciation  of  Furniture  and  Fixtures,  19,184.02  1,957.04  17,226.98 
Automobile  Expenses,  including  Depre- 
ciation,   5,031.55  4,632.05  399.51 

Amortization  of  Improvecients  to  Leased 

Property, 9,825.70  1,710.94  8,114.76 

Taxes  (Other  thar.  Income  and  Excess 

Profits  Taxes), 9,554.00  2,386.00  7,168.00 

Insurance, 5,372.71  985. o8  4,366.13 

Miscellaneous   Operating  Expenses, 7,610.90  1,264.43  6,546.47 

Salaries   of  Officers, 23,130.48  4,015.17  19,115.31 

General  Office   Expenses, 8,292.^J3  l,4o9.55  5, 653. 40 

Legal   and  Auditing  Expenses, 4,116.91  1,541.06  2,575.85 

Miscellaneous   General  Expenses, 9.528.45 ?'Jj-^-tl    ^.        6,61e;.01 


Total, £1.287.330.04   $627,860.06   $765. 114.29   $1,130,075.61 

PROFIT   FROM  OPERATIONS, $      201.749.20  $      7,263.72    $      194,455.48 

OTHER   INCOME   CP^DITS   -   CASH  DISCOUNTS,  

INTEREST,    Aim  SUNDRY  COvHIISSIONS, 8.497.46 

CROSS   INCOME, I      210,246.65 

INCOME   CHARGES  -   INTEREST   AND   FEDERAL 

TAXES, 57.019.52 

MET   INCOME, 5      153,227.04 

SURPLUS,    N0VEI,3ER   1,    1919,...    $107,868.48 

Lees   Adjustments   Applicable 

to  Prior   Period  -   Net,...        29.618.19  78.250.29 

GROSS  SURPLUS, S      231,477.33 

DIVIDENDS, .  50.000.00 

SURPLUS,    APRIL  30,    1920, $      181,477.33 


143 

CHAPTER  IV 
CONSOLIDATED  STATELIENTS 

There  has  recently  been  so  much  discussion  of  the  sub- 
ject of  consolidation  of  the  accounts  of  affiliated  companies, 
especially  with  regard  to  consolidated  tax  returns,  that  it  seems 
hardly  necessary  to  undertake  to  prove  the  desirability  or  ne- 
cessity for  the  preparation  of  consolidated  financial  statements 
for  groups  of  companies  in  order  to  exhibit  true  conditions. 
Statements  showing  the  financial  condition  and  operations  of  a 
holding  or  parent  company,  even  if  accompanied  by  data  bearing 
upon  the  value  of  its  investments  in  subsidiary  companies,  or  by 
complete  statements  for  those  companies,  do  not  accomplish  the 
result  to  be  desired,  which  is  to  disclose  the  accounts  of  the 
group  of  companies  as  an  entity,  conforming  to  actxial  operating 
conditions. 

Under  present  conditions  of  inter-corporate  relations 
in  this  country,  perhaps  most  of  the  corporations  a  majority  of 
whose  capital  stocks  are  ovmed  by  other  corporations  are  in 
effect  merely  branches  of  the  latter,  having  been  organized  or 
continued  as  separate  corporations  merely  for  reasons  of  ex- 
pediency.  It  follov/8,  therefore,  that  to  exhibit  the  true  con- 
dition of  the  companies  all  inter-company  balances  in  asset  and 
liability  accounts  should  be  eliminated,  and  the  actual  assets 
and  liabilities  of  the  subsidiary  companies  should  be  substitut- 
ed for  the  representative  investment  account  or  accounts  on  the 
books  of  the  parent  company;  also,  to  exhibit  the  actiial  opera- 


144 

tlons  of  the  group,  all  inter-company  transactions  should  be 
eliminated. 

Consolidation  of  the  accounts  is  appropriate  whenever 
the  ovmership  in  one  company  is  all,  or  substantially  all,  vested 
in  another  company.   In  doubtful  cases,  where  the  ownership  is 
between,  say,  fifty  per  cent  and  ninety-five  per  cent,  judgment 
must  be  exercised  as  to  v;hether  the  true  conditions  are  better 
expressed  by  individiial  or  consolidated  statements. 

It  is  also  appropriate  in  some  cases  to  consolidate 
the  accounts  of  companies  which  are  not  related  directly  by 
stock  ownership  but  are  controlled  by  the  same  interests.   This 
involves  merely  the  elimination  of  inter-company  balances  and 
transactions  and  the  combination  of  the  other  accconts. 

In  technical  accounting  parlance,  the  word  "consoli- 
dated" is  confined  to  the  accounts  of  t.vo  or  more  legally  sepa- 
rate businesses.   The  term  should  not  be  applied  to  the  accounts 
of  the  several  branches  or  departments  of  one  business. 

There  are  two  classes  of  consolidated  statements. 
Those  of  one  class  exhibit  merely  the  result  of  the  consolida- 
tion and  those  of  the  other  show  on  one  sheet  the  accounts  of 
each  of  the  companies,  the  eliminations,  and  the  consolidated 
total.   The  former  are  usually  entitled  "Consolidated  Balance 
Sheet"  and  "Statement  (or  Summary,  or  Condensed  Statement)  of 
Consolidated  Income  and  Profit  and  Loss;"  the  latter,  "Balance 
Sheets  and  Consolidation"  and  "Statements  of  Income  and  Profit 
and  Loss  and  Consolidation."   The  choice  of  these  forms  obvi- 


145 


ou£5ly  depends  upon  the  purpose  for  which  they  are  prepared:   In 
some  cases  only  the  aggregate  figures  are  desired;  in  other 
cases,  v/hen  statementa  for  one  or  more  of  the  constituent  com- 
panies are  desired,  it  is  expedient  to  shov;  the  operation  of  con- 
solidation rather  than  to  prepare  separate  statements  for  the 
consolidation  and  for  the  companies  individually. 

In  theory,  all  inter-company  balances  receivable  and 
payable  should  be  eliminated  in  consolidated  statements,  but  in 
actual  practice  there  are  often  current  open  items  of  relatively 
inconsiderable  amount  '.vhich  are  in  transit  between  companies  or 
which  have  not  been  cleared  in  the  regular  course  of  business, 
the  adjustment  of  which  by  the  accountant  is  not  essential.   If 
taken  up  on  the  books  such  minor  adjustments  would  unnacessarily 
interfere  with  the  clerical  routine;  and  if  not  taken  up  on  the 
books,  they  would  have  the  generally  undesirable  effect  of  mak- 
ing the  statement  different  from  the  books.   Therefore,  it  is 
usually  better  to  eliminate  the  smaller  balance,  leaving  the 
reriiainder  of  the  larger  balance  in  Accounts  Receivable  or  Ac- 
counts Payable.   In  exceptional  cases  the  uneliminated  amounts 
may  be  specifically  described  as  such  in  the  consolidated  bal- 
ance sheet.   If  it  is  necessary  in  the  preparation  of  an  audit 
report  to  make  adjustments  in  the  preparation  of  statements, 
which  are  not  taken  up  on  the  cocks,  the  det2.ils  should  be  in- 
cluded in  the  report  or  in  a  supplemental  memorandum. 

Any  difference  between  the  anicunts  carried  by  one 
company  as  an  asset  and  by  another  company  as  a  liability,  in 


14-6 

respect  of  the  same  indebtedness,  should  be  adjusted.   If,  for 
example,  company  "A"  has  borrowed  from  company  "B, "  and  the 
latter  company  has  for  some  reason  written  off  part  of  the  asset 
account  (or  of  the  book  value  of  notes  if  notes  have  been  given) 
in  the  preparation  of  a  consolidated  balance  sheet  the  consoli- 
dated surplus  should  be  increased  by  means  of  a  red  figure  in 
the  elimination  column,  so  that  the  entire  amo\int  of  the  lia- 
bility carried  on  the  books  of  company  "A"  may  be  eliminated. 
If  instead  of  reducing  the  asset  accoimt  company  "B"  had  estab- 
lished a  reserve,  the  sunount  of  the  reserve  would  be  eliminated 
against  the  increase  in  siirplus. 

In  a  consolidated  profit  and  loss  statement,  accom- 
panying a  consolidated  balance  sheet,  effect  should  also  be 
given  to  any  adjustment  of  surplus  such  as  the  foregoing.  If 
the  adjustment  of  surplus  is  a  reversal  of  a  charge  or  credit 
during  the  period  covered  by  the  statement  and  shown  therein, 
the  increase  or  decrease  of  the  surplus  at  the  end  of  the 
period  will  usually  be  sufficiently  explained  by  being  offset 
against  that  item;  otherwise  it  is  generally  necessary  to  ex- 
plain the  adjustment  in  a  footnote. 

The  proced\ire  in  the  case  of  bonds  of  one  company 
p\irchased  by  another  at  a  discount  is  the  same  as  for  differ- 
ences in  acco\ants  or  notes  as  explained  above,  unless  the  issu- 
ing company  sold  the  bonds  at  a  disco\ant  and  is  carrying  in  its 
accounts  some  part  of  such  discount  as  a  deferred  charge  to 
profit  and  loss.  As  an  illustration,  let  it  be  assumed  that 


147 


company  "A"  owns  $100,000.00  par  value  of  bonds  of  company  "B, " 
which  wera  purchased  for  $95,000.00  and  are  carried  at  c.st;  the 
bonds  were  sold  by  company  "B"  to  underwriters  at  90;  the  term 
of  the  bonds  is  twenty  years,  of  which  two  have  elapsed,  so  that, 
as  to  the  $100,000.00  of  bonds  in  question,  company  "B"  is 
carrying  xinamortized  bond  discount  of  $9,000.00.  The  elimina- 
tions in  this  case  would  be  as  follows: 

Assets: 

Bond  Investment $  95,000.00 

Unamortized  Bond  Discount..    9,000.00  $104,000.00 

Liabilities: 

Bonds $100,000.00 

Surplus 4.000.00  104,000.00 

In  the  foregoing  example,  company  "B"  is  regarded,  for 
the  purpo-^e  of  the  consolidation,  as  having  a  net  liability  on 
account  of  these  bonds  of  only  $91,000.00;  for  this  claim 
against  the  property  of  company  "B, "  company  "A"  has  paid 
$95,000.00,  or  $4,000.00  more  than  the  bonds  are  now  worth, 
which  amount  must  be  treated  as  a  loss.   If  the  bonds  had  been 
purchased  by  company  "A"  at  the  same  price  at  the  date  of  issue, 
the  difference  between  the  accounts  of  the  two  companies  to  be 
adjusted  by  charge  against  surplus,  representing  the  excess  of 
the  payment  by  company  "A"  over  the  cash  received  by  company 
"B, "  would  have  been  $5,000.00.  However,  $1,000.00  has  already 
been  charged  to  surplus  through  amortization  of  bond  discount. 

As  stated,  the  foregoing  example  is  predicated  upon 
the  assumption  that  company  "A"  continues  to  carry  the  bonds  at 


148 


cost.  Of  course,  that  company  might  have  kept  its  accounts 
properly,  so  that  the  book  value  of  the  bonds  would  be  increased 
periodically  by  credits  to  profit  and  loss,  with  a  view  to  carry- 
ing them  at  par  at  matiirity,  in  which  case  the  book  value  might 
closely  approximate  the  par  value  less  the  unextinguished  dis- 
count on  the  books  of  company  "B."   In  any  event,  the  procedure 
exemplified  in  the  foregoing  will  be  found  to  apply,  with  such 
adaptation  as  may  be  necessary.   If,  for  example,  the  bonds  had 
been  pxirchased  by  company  "A"  at  90,  the  other  conditions  being 
the  same  as  above,  there  would  be  am  increase  in  the  consoli- 
dated surplus  of  $1,000.00,  instead  of  a  decrease  of  $4,000.00. 

The  most  troublesome  feature  in  the  preparation  of 
consolidated  balance  sheets  is  the  adjusting  of  the  difference 
between  the  value  at  which  the  stocks  of  subsidiary  companies 
are  carried  on  the  books  of  the  parent  company  stnd  their  book 
value  at  the  date  of  acquisition;  i.e.,  their  par  value  (or 
stated  value,  in  the  case  of  stocks  without  par  value)  and  the 
surplus  at  that  time. 

It  seems  clear  that  the  sxorplus  at  the  date  of  ac- 
quisition should  be  taken  into  consideration,  as  [assuming 
for  the  present  that  all  the  stock  is  acquired)  all  the  net 
assets  of  the  subsidiary  company,  represented  by  the  stated 
value  of  the  capital  stock  and  the  surplus,  were  acquired. 
Take  a  hypothetical  case  where  the  stock  is  $100,000.00  and 
the  surplus  $50,000.00,  the  net  assets,  represented  by  the 
stock,  being  purchased  for  $150,000.00.   It  would  manifestly 


149 

be  illogical  to  state  that  the  parent  company  made  a  profit  of 
$50,000.00  in  the  purchase.   If  any  part  of  the  surplus  of 
$50,000.00  is  paid  out  in  dividends  it  is  in  effect  a  refiind  of 
part  of  the  purchase  price  of  the  stock  and  should  be  credited 
to  the  investment  account  on  the  books  of  the  holding  company., 
It  follows,  then,  that  the  par  value  of  the  stock  plus  the  sxir- 
plus  at  the  date  of  acquisition  should  be  eliminated  against  the 
investment  account  on  the  books  of  the  holding  company. 

If  the  holding  company  paid  more  than  $150,000.00  for 
the  stock,  it  paid  for  good-will;  therefore,  any  excess  of  the 
investment  valuation  of  the  stock  over  the  par  value  and  the 
surplus  at  the  date  of  acquisition  should  be  treated  in  the  con- 
solidation as  good-will.   If  the  holding  company  paid  less  than 
$150,000.00  for  the  stock,  the  excess  of  $150,000.00  over  the 
cost  is  a  profit,  but  not  one  that  should  be  shown  in  a  state- 
ment as  derived  from  operations;  therefore,  any  excess  of  the 
par  value  of  the  stock  plus  the  surplus  at  the  date  of  acquisi- 
tion over  the  investment  value  on  the  books  of  the  holding  com- 
pany should  be  treated  as  capital  surplus,  unless  the  holding 
company  has  set  up  a  valuation  of  good-will  directly  or  indirect- 
ly in  connection  with  the  purchase,  in  which  latter  case  the 
excess  should  be  deducted  from  the  good-will. 

When  it  is  stated  on  the  one  hand  that  good-will 
should  be  charged,  and  on  the  other  hand  that  capital  surplus 
should  be  credited,  it  is  not  intended  to  prescribe  the  use  of 
those  terms  exclusively.  The  only  essential  point  is  that  the 


150 


facts  be  ditclosed  as  clearly  as  practicable.   It  would  be 
appropriate  to  describe  the  balance  sheet  asset  item  specifically 
in  some  such  language  as  "Excess  of  Cost  (or  Investment  Value)  of 
Stock  of  Subsidiary  Company  over  Its  Value  on  the  Books  of  that 
Company  at  Date  of  Acquisition,"  and  the  liability  item  as  "Ex- 
cess of  Par  Value  of  Stock  of  Subsidiary  Company  and  Surplus  at 
Date  of  Acquisition  over  Its  Cost  (or  Investment  Valuation)." 

In  many  cases  the  amount  of  ths  surplus  of  the  sub- 
sidiary at  the  date  of  acquisition  is  such  a  small  proportion  of 
the  total  surplus  at  the  date  of  the  balance  sheet  that  no  mis- 
understanding could  result  from  not  distiirbing  the  surplus  but 
eliminating  only  the  par  value  of  the  stock.   In  this,  as  in  the 
elimination  of  inter-company  balances,  practical  considerations, 
rather  than  pure  theory,  should  govern,  especially  if  there  is 
any  objection  on  the  part  of  the  company  officials  to  reducing 
the  consolidated  surplus.   If  the  amount  is  considsrable  and 
there  is  objection  to  the  elimination,  practically  the  same 
effect  can  be  obtained  by  showing  two  classes  of  siirplus:   one 
including  the  earnings  of  the  subsidiary  as  a  part  of  the  con- 
Bolidation  and  the  other  representing  its  earnings  prior  to  its 
entering  into  the  consolidation. 

In  some  cases  practically  correct  results  may  be  ob- 
tained by  a  method  which  is  apparently  incorrect  but  which  may 
be  employed  on  account  of  its  relative  simplicity.  Tor  illus- 
tration, let  the  following  facts  be  assumed: 


151 


Par  value  of  capital  stock  of  subsidiary  com- 
pany -  all  acquired $  50, 000 .  00 

Surplus  at  date  of  acquisition 30,000.00 

Cost  of  stock  to  holding  company 70,000.00 

Combined  surplus  at  date  of  balance  sheet....   120,000.00 

As  the  holding  company  acquired  net  assets  of 
$80,000.00  at  a  cost  of  $70,000.00,  there  would  be  a  capital 
surplus  of  $10,000.00.   The  free  consolidated  surplus  at  the 
date  of  the  balance  sheet  would  be  $90,000.00  ($120,000.00  less 
$30,000.00).  The  two  surplus  items  might  properly  be  shown  on 
the  balance  sheet  as  follows: 

Surplus: 

Profit  and  Loss  Surplus,   per  Exhibit   "B"...   $  90,000.00 
Excess  of  net  assets  of  subsidiary  company 
at  date  of  acquisition  over  cost   of   stock 
to  holding  company 10.000.00 

Total  Surplus $100,000.00 

The  alternative  method  of  producing  practically  the 
same  result   is  as  follows: 

Surplus: 

Surplus  per  Exhibit  "B"  (including 

$30,000.00  surplus  of  subsidiary  com- 
pany at  date  of  acquisition  by  holding 

company) $120,000.00 

Less  excess  of  cost  over  par  value  of 

stock  of  subsidiary  company 20,  000.00 

Net  Surplus $100,000.00 

The  foregoing  references  to  Exhibit  "B"  are  based 
upon  the  assumption  that  in  the  first  example  the  surplus  of 
the  subsidiary  at  the  date  of  acquisition  has  been  dropped  from 


152 


that  statemsnt,  and  that  in  the  seoond  example  it  has  not. 

The  latter  method  exemplified  above  could  not  be  em- 
ployed if  the  surplus  of  the  subsidiary  at  the  date  of  acquisi- 
tion were  $10,000.00  Instead  of  $30,000.00  -  In  other  words,  if 
the  net  assets  of  the  subsidiary  were  less  than  the  cost  of  the 
holding  company.  In  such  a  case  the  difference  would  repr^sjnt 
good-will,  which  should  not  generally  be  deducted  from  the  sur- 
plus. 

In  determining  the  date  of  acquisition  when  the  stock 
has  been  purchased  at  different  dates  it  seams  to  be  proper  to 
take  the  date  when  control  was  acquired,  or  when  the  last  con- 
siderable block  of  stock  was  purchased.   In  all  cases  it  may  be 
necessary  to  select  the  nearest  date  when  the  books  were  closed. 

When  the  interest  of  the  holding  company  in  the  sub- 
sidiary is  less  than  the  whole,  the  procedure  differs,  as  it  is 
then  necessary  to  show  in  the  balance  sheet  the  interest  of  the 
minority  stockholders  of  the  subsidiary  to  the  extent  of  the 
par  value  of  their  stock,  and  it  is  desirable  to  show  also  the-ir 
interest  in  the  surplus  of  the  subsidiary  or  their  share  of  its 
deficit.   Assuming  that  the  subsidiary  has  a  surplus,  the  minori- 
ty interest  may  be  shown  by  either  of  th^se  methods: 

(1)   Capital  Stock: 

Holding  Company 
Subsidiary  Company  -  Minority 
Stock  Held  by  the  Public 

Total 

Surplus: 

Applicable  to  Stock  of 
Holding  Company 


153 


Applicable  to  Minority  Stock 
of  Subsidiary  Company 

Total 

(2)   Minority  Stockholders  of  Subsidiary  Company: 
Capital  Stock 
Surplus 

Total 

Equity  of  Stockholders  of  Holding  Company: 
Capital  Stock 
Surplus 

Total 

In  determining  the  interest  of  minority  stockholders 
when  preferred  stock  is  involved,  the  value  of  the  preferred 
stock  is  usually  taken  at  the  par  value  plus  accrued  dividends 
to  date.   The  value  will  be  different  if  the  preferred  is  en- 
titled to  any  share  in  the  profits  in  excess  of  the  stated  divi- 
dend rate. 

In  eliminating  the  investment  account  for  the  stock 

of  the  subsidiary  when  less  than  the  whole  of  its  stock  is  owned, 

only  the  holding  company's  proportion  of  the  surplus  at  the  date 

of  acquisition  can  be  considered;  but  the  minority  stockholdara ' 

interest  in  that  surplus  must  be  recognized.  The  following 

facts  are  assumed  for  the  purpose  of  exemplifying  the  procedure 

under  such  conditions: 

Capital  stock  of  subsidiary  company, $100,000.00 

Surplus  of  subsidiary  company  at  date  of 

acquisition, 50,000.00 

Proportion  of  stock  acquired  by  holding 

company, 90fJ 

Value  of  stock  acquired  by  holding  company  135,000.00 

Cost  to  holding  company, 160,000.00 

Surplus  of  subsidiary  company  at  date  of 

balance  sheet, 70,000.00 


I 


I 


154 


In  the  consolidation  the  liability  to  the  minority 
stockholders  v/ill  be  shown  as  follows: 

Capital  Stock, $10,000.00 

Surplus, 7,000.00 

Total, $17,000.00 

An  asset  of  $25,000.00  will  be  set  up,  designated  as 
"Good-Will,"  or  as  "Excess  of  Cost  of  Stook  of  Subsidiary  Compa- 
ny over  its  Par  Value  and  the  Sxorplus  Applicable  Thereto." 

The  eliminations  from  the  specific  asset  and  liability 
items  will  be  as  follows: 

Asset  -  Investment  Aocoxint, $160,000.00 

Liabilities: 

Capital  Stock, $100,000.00 

Surplus  (balance  at  date  of  acquisi- 
tion plus  lOfj  of  increase), 52,000.00   152.000.00 

Net  Asset, $  8,000.00 

for  which  will  be  substituted: 

Asset  -  Good-Will  (excess  of  investment  aocoiont 

over  value  at  date  of  acquisition), $  25,000.00 

Liabilities  -  Minority  Stockholders, 17,000.00 

Net  Asset, $  8,000.00 

From  the  standpoint  of  the  balance  sheet  alone  the  fore- 
going solution  is  complete,  but  consideration  should  be  given  to 
the  effect  upon  the  profit  and  loss  statement,  in  which  the  8\ir- 
plus  is  carried  forward  from  year  to  year.   It  will  be  seen  that 
we  have  a  minority  interest  of  $5,000.00  in  the  s\irplus  at  the 
date  of  acquisition  by  the  holding  company.   If  the  entire  bmt- 


155 


plus  of  $70,000.00  were  shown  in  the  profit  and  loss  statemsnt, 
deduction  could  not  be  made  therefrom  of  the  interest  of  the 
holding  compajiy  in  the  surplus  at  the  date  of  acquisition,  viz., 
$45,000.00,  as  that  would  leave  $25,000.00  as  the  surplus  earned 
since  acquisition,  divisible  into  1,000  shares,  whereas  only 
$20,000.00  was  earned  during  that  period  and  $5,000.00  is  divi- 
sible into  100  shares.  Therefore,  the  entire  surplus  at  the 
date  of  acquisition,  $50,000.00,  should  be  eliminated  from  the 
profit  and  loss  statement  and  carried  in  separate  accounts, 
$45,000.00  being  carried  as  surplus  pertaining  to  the  majority 
stock  and  $5,000.00  as  surplus  pertaining  to  the  minority  stock. 
Then,  if  full  details  of  the  division  of  surplus  are  to  be  shown 
on  the  balance  sheet,  reference  being  made  to  the  profit  and 
loss  statement,  it  should  be  shown  somewhat  as  follows,  assuming 
that  the  surplus  of  the  holding  company  from  other  sources  is' 
$100,000.00: 

Surplus: 

Profit  and  Loss  Surplus: 

Applicable  to  Stock  of  Holding  Company, $118,000.00 

Applicable  to  Minority  Stock  of  Subsidiary  Com- 
pany,      2.000.00 

Total  per  Exhibit  "B", $120,000.00 

Surplus  of  Subsidiary  Company  at  Date  of  Acquisi- 
tion Applicable  to  Minority  Stock, 5,000.00 

Total  Surplus, $125,000.00 

When  goods  are  sold  by  one  affiliated  company  to  an- 
other at  a  profit  to  the  seller,  it  is  necessary  to  eliminate 
not  only  the  inter-company  sales  and  purchases  but  also  the  pro- 
fit taken  by  the  seller  on  such  of  the  goods  as  remain  in  the 


156 


hands  of  the  buyer,  thereby  reducing  the  consolidated  surplus. 
This  may  be  effected  in  the  form  of  an  elimination  from  the 
total  surplus,  and  the  creation  of  a  reserve,  in  the  consoli- 
dated figures  only, by  means  of  a  red  figure  in  the  elimination 
column.   In  correctly  stating  the  profits  for  a  period,  con- 
sideration should  also  be  given  to  the  inflation  of  the  consoli- 
dated inventory  at  the  beginning  of  the  period,  the  surplus 
being  reduced  in  the  same  manner  as  at  the  end. 

In  all  audit  reports  containing  consolidated  state- 
ments, the  names  of  the  subsidiary  companies  should  be  shown 
so  that  there  can  be  no  misunderstanding  as  to  what  companies 
are  inclxided.  This  information  is  generally  given  in  the  presen- 
tation, but  if  there  are  only  two  or  three  names  they  may  also 
be  shov/n  in  the  headings  of  the  statements.  Of  course,  the 
latter  procedure  is  not  necessary  in  statements  showring  the  de- 
tails of  consolidation,  when  the  names  are  shown  in  the  column 
headings. 

*  *  *  4>  * 

Following  are  specimen  forms  of  consolidated  state- 
ments, designed  to  show  the  application  of  the  principles  enunci- 
ated in  the  foregoing. 

Form  32  is  a  consolidated  balance  sheat  (after  apply- 
ing eliminations)  and  comparison  with  a  prior  date. 

Form  33  dhows  the  balance  sheets  of  each  of  the  compa- 
nies and  the  eliminations,  resulting  in  the  consolidation  shovm 
in  Form  32.   These  forms  exemplify  one  method  of  showing  the 


157 


intarest  of  minority  stockholders  in  the  capital  stock  and  sur-  • 
plus,  and  also  the  addition  to  intangible  values  of  the  excess 
of  cost  of  stocks  of  subsidiaries  over  their  par  value  -  which 
has  been  assximed  in  this  case  to  be  approximately  their  actual 
value  as  shown  by  the  books  of  the  subsidiaries  at  the  time  of 
acquisition  by  the  parent  company.  There  is  also  illustrated 
in  these  balance  sheets  and  in  the  accompanying  income  and  pro- 
fit and  loss  statements  (Forms  34  and  35),  the  procedure  in 
eliminating  differences  between  asset  values  and  face  values  of 
inter-company  indebtedness. 

The  eliminations  in  this  form,  and  in  Forms  37  and  38, 
are  nvunbered  for  the  convenience  of  the  reader  in  locating  the 
corresponding  items. 

Forms  34  and  35  are,  respectively,  summaries  of  in- 
come and  of  profit  and  loss  of  each  of  the  companies  and  consoli- 
dation, supporting  Forms  32  and  33.  Here  are  exemplified  various 
eliminations  of  inter-oompany  charges  and  credits,  including  the 
reversal  of  a  charge  representing  provision  for  loss  on  notes  of 
a  subsidiary  and  the  addition  to  surplus  of  the  difference  be- 
tween the  book  value  of  bonds  of  a  subsidiary  owned  by  the  parent 
company  over  their  par  value  less  the  related  proportion  of  un- 
amortized bond  discount. 

Form  36  is  a  consolidated  balance  sheet  exemplifying 
particularly  the  treatment  of  surplus  of  subsidiary  companies 
at  the  dates  of  acquisition  when  there  is  a  minority  interest 
in  the  subsidiaries  and  when  it  is  desired  to  render  a  statement 


158 

of  income  and  profit  and  loss  showing  the  surplus  earned  by  the 
oonsolidated  companies. 

Form  37  shows  the  balance  sheets  of  three  companies 
and  consolidation,  in  which  is  illustrated  another  method  of 
applying  the  difference  between  cost  and  actual  value  (as  shown 
by  the  books)  of  stocks  of  subsidiary  companies.   In  this 
balance  sheet  and  the  accompanying  statement  of  income  and  pro- 
fit and  loss  (Form  38)  are  shown  the  deduction  from  the  deficit 
at  the  date  of  the  balance  sheet  of  the  deficit  and  surplus  of 
subsidiaries  at  the  dates  of  acquisition. 

Form  38  shows  the  statements  of  income  and  profit  and 
loss  and  consolidation  supporting  Form  37.  It  contains  several 
eliminations  affecting  the  operating  accounts. 


159 


FORM  52 

BLANK  RAILROAD  &  ELECTRIC  CORPORATION 
AND  SUBSIDIARY  COMPANIES 

CONSOLIDATED  BALANCE  SHEET,  DECEMBER  31,  1919, 
AND  COMPARISON  WITH  DECBIBER  51,  1918 


DECEMBER  51,     INCREASE 
1919       ♦DECREASE 


ASSETS 

PROPERTY,  FRANCHISES,  ETC . , $6.595.578.49  $481.512.50 

SECURITIES  OWNED, |  278.514.01  %   50,000.00 

SINKING  FUNDS  -  CASH  AND  ACCRUED  INTEREST, $   24.020.10  *$  5.762.50 

CURRENT  ASSETS: 

Cash, $  212,771.26  $19,612.71 

Notes  Receivable, 58,119.17  15,212.95 

Accounts  Receivable,  Less  Reserve, 80,019.52  •  25,514.25 

Accrued  Interest  Receivable, 82,166.92  5,527.00 

Materials  and  Supplies, 455.664.59  95.026.18 

Total  Current  Assets, $  886,741.26  $109,664.61 

DEFERRED  CHARGES: 

Unamortized  Debt  Discount  and  Expense, $  162,502.57  •$  12,516.54 

Work  Under  Construction, 25,088.79  18,124.90 

Prepaid  Insurance ,  Taxes ,  etc . , 50.909.57  7,625.12 

Total  Deferred  Charges, $  256,500.55  $  13,255.46 

TOTAL, $7,820,954.59  $650.448.09 

LIABILITIES 

CAPITAL  STOCK: 

Blank  Railroad  &  Electric  Corporation, $2,500,000.00 

Minority  Stock  of  Subsidiary  Compemies, 175.500.00  *$  15.200.00 

Total  Capital  Stock, $2,675,500.00  *$  15,200.00 

»  FUNDED  DEBT  (Less  Bonds  Held  in  Sinking  Funds): 

Blank  Railroad  &  Electric  Corporation, $1,762,000.00  $154,000.00 

Subsidiary  Companies  -Bonds  Held  by  Public, 1.095.000.00  *  45.000.00 

Total  Funded  Debt, $2,857,000.00  $109.000.00 

CURRENT  LIABILITIES: 

Notes  Payable, $  -342,082.00  $120,375.00 

Accounts  Payable, 664,696.52  209,316.92 

Accrued  Interest,  Taxes,  etc., 176.907.49  89.653.04 

Total  Current  Liabilities, $1,185,686.01  $419.544.96 

PRESERVES:  — 

Renewals  and  Replacements, $     659,701.25  $  52,526.19 

Injuries  emd  Damages, 52.727.89  *       5.041.15 

Total  Reserves , $     672,429.14  $  47,285.04 

i  SURPLUS,    PER  EXHIBIT    "D": 

Applicable  to  Stock  of  Blemk  Railroad  &  Electric 

Corporation, $     405,024.52  $  83,706.97 

Applicable  to  Minority  Stocks  of  Subsidiary  Com- 
panies,   27.314.92  6.511.12 

Total  Surplus , $     452,559.24  $  90,018.09 

TOTAL, $7,820,954.59  $650.448.09 

•     Typed  in  red. 

EXHIBIT   "A" 


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FORM  a 
BLAM  HAILROAD  &  ELECTRIC   CORPORATION  AM  SUBSIDIARY  COUFAllIES 
'bALAIICE   sheets.    DECE:mER  31.    1919.    AllJ  COMSOLIDATIDII 


BLANK  RAILROAD 

OONSOLIDATIOK JELEOTHIC  SUBSIDIARY  SUBSIDIARY 

TOTAL ELIMINATIONS  CORPORATION  "A"  »B" 


ASSETS 

PROPERTY,    FRANCHISES.    ETC.-. $6.395.37B.49 

STOCKS  OF  SUBSIDIARY  COMPANIES. 

BOHDS  OF  SUBSIDIARY    "A", 

OTHER  SECURITIES, {      g7a.5147gr 

SINZINO  FUNDS  -   CASH  AND  ACCRUED   IHTEHEST, $        ii'C>iO.\6 

CUHKENT   ASSETS: 

Cash $     212,771.26 

Notea  Receivable. 58,119.17 

Accounta  Receivable,    Leaa  Reaerve. 80,019.32 

Accruea  Intereat  Receivable, 82,166.92 

Materlala   and  Suppllea, 453.664.59 

Total  Current   Aeeets, $     886.741.26 

DUE  FROM  AFFILIATED   COliPANIES: 

Notea , 

Accounta  and  Accrued  Interest, 

Total  Due   froo  Affiliated  Com- 
panies   

DEFERRED  CHARGES: 

Unaicortlzed  Debt   Discount  ana  Expenue, 

Work  Under  Construotlon, 

Prepaid  Insurance,    Taxes,    ate, 

Total  Deferred  Charges. 

TOTAL. 


(1)'$      593.071.25 
(1)  S2,1S7:571.25 


(2)  $1:864:500.60 


$2. 16?. 571725" 

$i;a64;560.60 


$4,463.902.51        $1.336.404.73 


263;160.6S~ 


li,660.66~ 


ba.342.01" 


6:427.56 


lU. 072. OCT 


31912.46 


66,050.00 

$     178, 8357^5" 


71,304.90 

42,500.00 

74,285.96 

1,400.00 

319.324.68 


$     SOSlSlgTST' 


$        42,580.73 

15.619.17 

5.733.36 

716.92 

134.339.91 

$  ■  198  gaOTSff 


(3)  $     450,729.62 

(4)  293.914.82 


$      398,229.62 
211,085.34 


52,500.00 
43,212.71 


$ 

744.644.44 

$ 

609,314.96 

$ 

95.712.71 

$ 

39,616.77 

$ 

162,362.37 
23.688.79 

50.909.37 

(2) 

$ 

66.367.56 

$ 

82,563.08 
4.728.00 

$ 

104,927.50 
23,088.79 
44.003.44 

$ 

41,119.29 
2.177.83 

i 

236.300.53 

$ 

66.307.50 

$ 

87,291.08 

$ 

172; 616. 73 

$ 

43,297.22 

il 

,820.954.39 

_M 

589,951.94 

$4,464,393.66 

$5,303,220.06 

$1,643,293.27 

LIABILITIES 

CAPITAL  STOCK: 

Blank  Railroad  i  Electric  Corporation, $2,500,000.06 

Subsidiary  Companies, 175.500.60     (11 

Total  Capital   Stock, $2,6751566.66 

FUNDED  DEBT    (Lees  Bonds  Held   in  Sinking  Funds): 

Blank  Railroad  &  Electric   Corporation $1,762,060.00 

Subsidiary  Companies, 1.095.000.00     (2) 

Total  Funded  Debt , $2;8S7i666.06 

CURREilT  LIABILITIES: 

Notes    Payable, $      342,082.00 

Accounts  Payable, 664,696.52 

Accrued  Interest,    Taxes,    etc., 176.967.49 

Total  Current  Liabilities, $1,183,686.61 

DUE  TO   AFFILIATED  COMPANIES: 

Notes, (3) 

Accounts  and  Accrued  Interest , (4) 

Total  Due  to  Affiliated  Companies,  

RESERVES: 

Renewals  and  Replacements, $     638,761.25 

Injuries  and  Damages, 32.727.89 

Total  Reserves , £     6721429.14 

SURPLUS,    PER  EXHIBIT    "D", $      432,339.24       la)' 

TOTAL, $7,820,954.39 

•     Typed  in  red. 


tl. 574. 500. 00 


$2,560,066.00 


tl. 574. 506. 66       $2.500.000.60  ' 


$1. 

~$rr 


500.000.00 


566.666.0^ 


$1,762,000.00 

.263.000.00 

.263,000.60       $1,762,006.00 


1.966,000.00       $     372,000.66 


$1,966,000.06       $     372; 000. 00 


2,531.54 
58.319.74 


282,082.66 
549.982.71 
101.395.25 


60,000.06 
112,182.27 
17.192.56 


$       66.851.26       $     933,459.96       $     189.374.77 


508.135.83 
293.914.62 


$     803.050.75 


37.230.53 


312.316.42 
192.364.71 


186.819.51 
64.318.58 


37,230.53       $     564,681.13       t     261. 139. Cg 


$     420,688.34 
23.867.75 


218,612.81 
8.760.14 


444:656.69      $     228:373705 


$      50,598.81       $     104.311.18       j     165!622!66      $       92!466!36 
$3,569.951.94        $4,464.393.00        $5,303,220.06        $1,643.293.27 


(a)   Decrease   in  surplus,    comprieing: 

(3)    Increase   from  notee, $58^ 

[2)   Decrease  from  bonds,    etc.,..  7, 

Net   Increase, $50, 


406.31 
807.50 


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BLANK  :jiiii:.'a  &  liilliug  coispAinr 

Am  SUBSIDIARY   COtgA:iIES 
COKSOLIDATED  BALANCE  SHEET.   EECEilBER  31.    1919 


ASSETS 

CAPITAL  ASSETS: 
Ore  Reaarvee  and  ::ineral 

Rights, $23,766,225.37 

Lese  Reaarve  for  Deple- 
tion,    6.832.308.73   $16,933,916.64 

Real  Estate,  Ulna  Buildings, 

Maoninery,    etc., $9,092,608.57 

Leee  Reserve   for   Depre- 
ciation,   527.082.91  8,565,525.66 

Railroad  Property  and 


Equipment, $  3,216,577.75 

Less  Reserve  for  Depre- 
ciation,       357,275.44 


2.859.302.32 


Total  Capital  Assets, $28,358,744.62 

30,016.23 
$       947,781.88 


SIKKINO  FUIID  ASSETS  -   CASH  AND   ACCRUED   INTEREST   (Bonds  Da 
ducted  from  Funded  Debt ,    per  Contra) , 


gurre:;t  assets: 

Cash , 

United  States  Treasury  Certificates  of 
Indebtedness , 

Liberty  Loan  Bonds  and  Notes  -   Par  Value,. 

Accounts  and  liotea  Receiv- 
able,     $   1,417,529.68 

Less  Reserve   for   Loasea,.  29.612.41 


Finished  Product,  Work  In  Proosaa 
Materials  and  Supplies,.. 


and 
Total  Current  Aeaets, 


1,200,000.00 
2,200,000.00 


1,387,917.27 
1,684,364.56 


DEFERRED  CHARGES, 


7,420,063.71 
68,337.70 


$35,877,962.26 


LIABILITIES 

CAPITAL  STOCK: 

Blank  Mining  &  Llllllng  Coir.pany: 

Preferred  -   100,000  Shares   of  $100.00 

eaoh, 310,000,000 .00 

Conmon  -  400,000  Shares  without  Par 

Value, 19,525,000.00 

Subsidiary  Companlea  -  Minority  Stocka 

Held  by  the  Public, 123.500.00 

Totil  Capital  Stock, $29,748,500.00 

FUIfDED  DEBT: 

Subsidiary  Company  Flr^t  Mortgage,  5'% 

Bonda,  Due  1947, 

Less  Bonds  Held  by  Sinking  Fund  Trustees 
and  In  Treaaury, 


3,000,000.00 
763.000.00 


Total  Funded  Debt, 


2,237,000.00 


CURHEMT  LIABILITIES: 

Aocounts   and  Wages   Payable, $       566,952.68 

Accrued  Taxes, 225,314.96 

Accrued  Interest, 31,328. 13 

Total  Current   Llabllltlee, 

DEFERRED  CREDITS, 

RESERVE  FOR  OOHIINGEIIOIES, 


643, 

12, 

723, 


595.77 
035.90 
644 .  02 


SURPLUS: 

Profit   and  Loss   Surplxis: 

Applicable  to  Stock  of  Blank  Ulnlng  & 

Milling  Company, $  1,894,979.48 

Applicable  to  Minority  Stock  of  Sub- 
sidiary Companies 29.750.62 

Total,  per  Exhibit  "B", $  1,924,730.10 

Surplus  of  Subsidiary  Companies  at  Datea 
of  Acquisition  Applicable  to  Minority 

Stock, 32,517.14 

Excess  of  Par  Value  of  Stocks  of  Sub- 
sidiary Companies  Owned,  together  with 
Surplue  at  dates  of  Acquleltlon  Appli- 
cable Thereto,  Over  Cost, 355,709.33 


Total  Surplus, . 


2,312,936.57 


TOTAL, $35.877.962.26 


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168 

CHAPTER  Y 
MISCELLANEOUS  STATEMENTS 

The  statements  other  than  balance  sheets  and  income  and 
profit  sind  loss  statements  which  are  most  often  rendered  in  ac- 
coxintants'  reports  are  schedules  showing  the  details  of  items  in- 
cluded therein,  statements  of  cash  receipts  and  disbursements,  and 
statements  of  adjustments  necessary  to  bring  the  books  into  con- 
formity with  the  principal  statements  rendered.   Such  miscellane- 
ous statements  are  illustrated  to  some  extent  in  the  forms  of 
this  chapter. 

SCHEDULES 

Schedules  to  balance  sheets  and  statements  of  income 
and  profit  smd  loss  seem  to  require  but  little  illustration,  as 
they  are  either  very  simple  or  they  closely  follow  the  arrange- 
ment of  the  exhibits  which  they  support.  The  forms  selected  for 
exemplification  are  as  follows: 

Form  39  is  a  schedule  of  notes  receivable,  showing  the 
security  therefor. 

Form  40  is  a  schedule  of  investment  securities,  show- 
ing market  values. 

Form  41  is  a  schedule  of  property,  with  corresponding 
depreciation  reserves,  showing  the  net  book  value  of  each  item. 

Form  42  shows  the  cost  of  sales  of  a  paper  mill,  with 
certain  statistical  data. 


169 

Form  43  is  a  oomparative  statement  of  department  opera- 
tions of  a  hotel.   In  this  case  the  profit  or  loss  from  each  de- 
partment Is  carried  to  the  exhibit  separately. 

Form  44  is  another  statement  of  department  operations, 
supporting  an  item  "Department  Profit"  in  the  exhibit,  with  cer- 
tain ratios  and  explanations  of  the  bases  of  apportionment  of 
certain  expenses. 

STATEMENTS  OF  CASH  RECEIPTS  AND  DISBURSEMENTS 

Forms  45,  46,  and  47  are  designed  to  Illustrate  the 
usual  form  of  statements  of  cash  receipts  and  disbursements 
xinder  three  different  conditions,  which  are  self-explanatory. 
The  question  is  often  raised  as  to  the  treatment  of 
minor  refxinds  of  expenses,  etc.,  whether  they  should  be  treated 
as  receipts  or  as  deductions  from  disbursements.   In  nearly  all 
cases  where  a  statement  of  cash  receipts  and  disbursements  is 
called  for,  the  accounts  are  kept  on  a  cash  basis  and  the  state- 
ment of  receipts  and  disb\arsements,  or  most  of  it,  is  in  fact  a 
statement  of  income  and  expenses.  When  such  is  the  case  it 
appears  to  be  logical  to  deduct  most  refunds  from  the  items  of 
receipts  and  disbursements  to  which  they  relate.  Ignoring  the 
fact  that  neither  the  "total  receipts"  nor  the  "total  disburse- 
ments" is  literally  correct. 

Form  48  has  been  prepared  as  a  suggestion  of  a  form 
of  statement  of  receipts  and  disbursements  to  be  used  when  it 
is  desired  to  exhibit  the  results  of  operations  and  when  there 
are  receipts  and  disbursements  other  than  those  relating  to  in- 


170 


come.   It  will  be  noted  that  In  this  form  the  excess  of  receipts 
over  dlsbxixsements  for  the  period  Is  arrived  at  and  the  balance 
at  the  beginning  of  the  period  is  added.   This  method  will  often 
be  foxond  convenient,  especially  when  the  receipts  cover  more  than 
one  sheet  and  It  would  be  necessary  to  forward  two  ajnoxints  If  the 
balance  at  the  beginning  were  stated  first. 

STATEMENTS  OF  ADJUSTMENTS 

When  the  adjustments  made  by  the  public  accountant  In 
the  preparation  of  the  balance  sheet,  etc.,  other  than  minor  re- 
classifications, have  not  been  made  on  the  books,  It  is  desir- 
able that  they  be  brou^t  to  the  attention  of  the  client  in  some 
way.  The  matter  may  be  covered  In  the  comments,  but  If  not,  the 
adjustments  are  usx:ially  submitted  as  an  exhibit  of  the  report,  in 
the  form  of  journal  entries  which  should  be  made  on  the  books. 
Such  a  statement  is  illustrated  in  Form  49. 

Another  method  sometimes  employed  is  a  reconcilement  of 
an  auditor's  and  his  client's  balance  sheets,  by  means  of  a 
columnar  statement,  with  the  several  itpms.  or  groups  as  column 
headings,  starting  with  the  balance  as  shown  by  the  company's  bal- 
ance sheet  and  applying  the  items  treated  differently,  using 
black  for  additions  and  red  for  deductions,  and  arriving  at  the 
balances  as  shown  by  the  auditor's  balance  sheet.  This  form  is 
rather  involved  and  its  general  use  is,  therefore,  not  recommend- 
ed. 


171 


STATEMENTS  OF  REALIZATION  AND  LIQUIDATION 

So  much  difficulty  is  experienced  by  most  accountants 
in  preparing  a  lucid  statement  of  realization  and  liquidation, 
and  there  is  such  a  dearth  of  practical  solutions  of  the  question 
in  standard  textbooks,  that  Form  50  has  been  prepared  with  a  view 
to  suggesting  what  may  be  done  under  the  assumed  conditions  to 
furnish  a  statement  which  is  intelligible  to  the  layman.   It 
appears  that  adaptation  of  this  form  to  the  conditions  of  any 
given  case,  with  the  possible  addition  of  supporting  statements, 
should  be  satisfactory. 


172 


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173 


FORM  40 


THE  BMNK  COMPANY 


INVESTMENT  SECURfTIES,  DECEMBER  31,  1919 


DESCRIPTION 


PAR  VALUE   BOOK  VALUE 


ESTIMATED 
MARKET 
VALUE 


BONDS: 

American  Telephone  &  Telegraph 

Company  63,  1S22, $  5,000.00   $  4,962.50   $  4,950.00 

Baltimore  &  Ohio  Railroad  Con- 
vertible 4-1/23,  1953, 15,000.00    12,456.25     8,550.00 

Lehigh  Valley  Railroad  6s,  1928   5,000.00     5,077.50     5,000.00 

Missouri  Pacific  Railroad  Gen- 
eral 4s,  1975, 10,000.00     6,418.75     5,525.00 

Pennsylvania  Railroad  General 

58,  1968, 10,000.00     9,625.00     8,962.50 

Public  Service  Corporation  of 

New  Jersey  General  5s,  1S59,     5,000.00     4,718.75     2,975.00 

Southern  Railv;ay  Development 

and  General  4s,  1956, 15,000.00    11,217.50     9,150.00 

United  Kingdom  of  Great  Britain 

and  Ireland  5-1/28,  1921,,..    5,000.00     4,925.00     4,775.00 

United  States  Liberty  Loan 
Bonds: 

First  Converted  4-l/4e, 10,000.00    10,000.00     9,350.00 

Second  Converted  4-1/48, 10,000.00    10,000.00     9,220.00 

Third  4-l/4a, 20,000.00    20,000.00    18,956.00 

Fourth  4-1/48, 20,000,00    20,000.00    18,440.00 

Victory  4-3/4f.  Notes, 25,000.00    25,000.00   __g4-,  735.00 

Total  Bonds, $144,401.25  $130,588.50 

STOCKS: 

John  Doe  &  Company,  Inc.,  29  ■ 

Shares, $2,900.00  $  2,900.00*$  3,500.00 

New  York  Central  Railroad  Com- 
pany, 100  Shares, 10,000,00     7,450.00     6,950.00 

Pennsylvania  Railroad  Company, 

100  Shares, 5,000.00     5,347.50     4,025.00 

United  States  Steel  Corpora- 
tion Preferred,  50  Shares,..    5,000.00     5.500.00     5.687.50 

Total  Stocks, $  21.197.50   $  20.162.50 

TOTAL, $165.598.75  $150.751.00 

♦  Information  furnished  by  the  President  of  the  Blank  Company. 

EXHIBIT  "A" 
SCHEDULE  #1 


174 


FORM  41 

THE  BLANK  COMPANY 

PROPERTY,    LESS  RESERVES  FOR  DEPRECIATION,    DECEMBER  31,    1919 


GROSS  BOOK 
VALUE 


DEPRECIATION 
RESERVES 


NET   BOOK 
VALUE 


PROVIDENCE: 

Land, $      150,000.00  $150,000.00 

Buildings, 327,261.00  $70,257.35        257,003.65 

Maohinery, 146,074.78  97,373.35         48,701.43 

Power  Plant  Equipment, 43,032.22  18,178.27         24,853.95 

Factory  Furnit\ire,    Fixtures, 

and  Appliances, 48,673.15  23,809.20          24,863.95 

Semi-dxirable  Tools  -  Inven- 
tory,   22,935.69  22,935.69 

Office  Fxirniture  and  Appli- 
ances,   29,200.22  15,103.42          14,096.80 

Automobile  Trucks  -  Inven- 
tory,   6,350.00  6,350.00 

Horses,   Wagons,    and  Harness  - 

Inventory, 3,215.00 3,215.00 

Total, $      776,742.06  $224,721.59      $552,020.47 

HARTFORD: 

Land, $        28,250.00  $28,250.00 

Buildings, 59,215.26  $     4,726.41          54,488.85 

Machinery, 144,773.63  39,918.87       104,854.76 

Factory  F\irnit\ire,    Fixtures, 

and  Appliances, 14,476.16  4,862.42            9,613.74 

Semi-d\irable  Tools  -  Inven- 
tory,   8,182.99  8,182.99 

Office  Furniture  and  Appli- 
ances,        670.54 172.20 498.34 

Total, $      255,568.58  $  49,679.90      $205,888.68 

TOTAL, $1,032,310.64  $274,401.49      $757,909.15 


EXHIBIT    "A" 
SCHEDULE  #1 


FQRtl  42 

BLANK  PAPER  MANUFACTURING  COMPANY 

COST  OF  SALES,  PAPER  MILL, 
FOR  THE  YEAR  ENDED  DECEMBER  31,  1919 


175 


TONS       AMOUNT 


COST  OF  PRODUCTION: 
Materials: 

Sulphite,  Own  Make, 1,285.851   $94,863.62 

Sulphite,  Purchased, 55.583     3,610.79 

Ground  Wood,  Own  Maike, 1,637.650    48,583.18 

Ground  Wood,  Purchased, 1,231.537    38,792.10 

Paper  Stock, 170.975     5,572.06 

Wrappers, 20.995       889.82 

Alum, 54.900     2,122.58 

Color, 883 .95 

Size, 3.446       187.02 

Total  Materials, 4,460.937  $195.505.12" 

Conversion: 

Superintendence, $  4,735.63 

Labor, 21,346.12 

Felts  and  Jackets, 9,908.33 

Canvas, 2,056.44 

Wires, 3,409.34 

Belting  and  Hose, 2,165.75 

Lubricants, 612.09 

Finishing  -  Labor  and  Material, 1,854.42 

Repairs  -  Labor  and  Material, 18,893.34 

Steam  Production: 

Coal, 3.509.939    20,493.75 

Labor  and  Other  Expenses, 6,708.83 

Electric  Light  and  Power  Purchased, 1,590.07 

Depreciation, 7,532.34 

General  Mill  Expenses, ■. 3.609.15 

Total  Conversion, $104.915.60 

Total  Cost  of  Production,  3,592.871  $300,420.72 

LESS  TRANSFERS: 

To  Sheet  Converting  Department, 454.211  $35,805.18 

To  Roll  Converting  Department, 910.892    86,686.47 

To  Folded  Converting  Department, 652.275    61,426.31 

Total, 2,017.378   $183,917.96 

REI.IAINDER  -  COST  OF  PRODUCTION,  PAPER  MILL,  ..  .  1,575.493   $116,502.76 

LESS  INCREASE  IN  INVENTORY, 9.298     1.344.53 

COST  OF  SALES, 1,566.195   $115,158.23 

STATISTICS  Tons 

Stock  Used, 4,460.937 

Paper  Produced, 3,592.871 

Loss  on  Stock  in  Conversion, 868.066 

Ratio  to  Stock  Used, 19.46^  ===== 

Coal  Used  Per  Ton  of  Paper  Produced     .977 

EXHIBIT  "B" 
SCHEDULE  #1 


176 


FORLI  43 

THE  BLANK  HOTEL 

DEPARTMENT  OPERATIONS  FOR  THE  YEPI>.  ElIDIKG  MAY  31,    1920, 
AND  COMPARISON  WITH  THE  PRECEDING  YEAR 


YEAR  ETOED 
MAY  31,1920 


incpj;ase 
•decrease 


ROOMS 

REVE:IUE, $164,998.43   $30.358.82 

EXPENSES: 

Wages  -  Housekeeper,  Maids,  Cleaners, 

etc., $   11,239.31     $        954.28 

Linen, 6,147.32         2,924.15 

Furnishings, 6,389.03         2,645.24 

Laiindry, 3,427.08  1,218.10 

Board  of  Employees, 8,540.25  817.42 

Miscellaneous, 3,612.91  1,044.79 

Total, $   39,355.91     $   9,503.98 

NET  PROFIT, $125,642.52  $20,754.84 

RESTAURANT 

SALES, $147,956.33     $46,034.83 

COST  OF  FOOD  SOLD, 95.685.28   12.569.82 

GROSS  PROFIT, $  52,271.05  $33,465.01 

Ratio  to  Cost, 54 . 63fo 32. Ol-;! 

EXPENSES: 
Wages: 

Chef,  Cooks,  Bakers,  Butchers,  etc.  $  12,646.11  $  2,570.17 
Waiters,  Checkers,  Pantrymen,  etc.,    16,085.23    3,146.42 

Kitchen  Fuel, 2,819.58      27.60 

Laimdry, 2,281.99      437.31 

China,  Glass,  and  Silver, 1,741.37      377.57 

Linen, 1,751.63    1,022.65 

Printing, 759.30*  47.53 

Flowers, 624.19  36.20 

Music, 2,047.10  312.74 

Board  of  Employees, 12,658.30    1,312.11 

Miscellaneous, 3.260.79   *  195.82 

Total, $   56,675.58      $  8,999~42 

NET  LOSS, $     4,404.54  *$24.465.59 

CIGAR  STAND 

SALES, $     6,089.75     $        627.54 

COST  OF  GOODS  SOLD, 3.917.85   *  76.05 

GROSS  PROFIT, $      2,171.90     $        703 .  59 

Ratio  to  Cost, 55.43fi  18.67^3 

EXPENSES  -  WAGES,    BOARD  OF  EI^IPLOYEES, 

AND  LICENSE, 649.00 86.12 

NET  PROFIT, $      1,522.90     $        617.47 

♦     Typed  in  red. 

EXHIBIT    "B« 

SCHEDULE  ^1  (Continued)   -   1. 


177 

FORltl  43 

THE  BLANK  HOTEL 

DEPARTMENT   OPERATIONS   FOR  THE  YEAR  ENDED  MAY  51,    1920,    ETC. 


YEAR  ENDED  INCREASE 

MAY  31,1920      * DECREASE 


BAR 

SALES  $75,533.71   $48,937.81 

COST  OF  GOODS  SOLD, 21,295.33    11.257.16 

GROSS  PROFIT, $  54,238.38   $37,680.65 

Ratio  to  Coat, 254 . 70fo 89. 75':"^ 

EXPENSES: 

Wages, $  5,325.41  $   762.50 

License, 1,500.00 

Board  of  Employees, 931.55       83.67 

Glassware,  eto., 560.24*     92.14 

Laundry, 116.59       19.58 

Miscellaneous, 527.64       47.62 

Total, $  8,761.43  $   82T725 

NET  PROFIT, $  45,476.95  $36,859.42 

NEWS  STAND 

SALES, $   1,719.55*$   267.07 

COST  OF  GOODS  SOLD, 1,608.70       82.93 

GROSS  PROFIT, $    110.85  *$   350.00 

Ratio  to  Cost, 6,8Qfo       *  23.31^5 

EXPENSES  -  WAGES  AND  BOARD  OF  EI^LOYEES       527  .  16 37.75 

NET  LOSS, $    216.31  $   587.75 

TELEPHONE 

REVENUE, $  6,455.01  $   618.72 

EXPENSES: 

Tolls  and  Service, $  5,940.76  $   467.19 

Less  Amount  Charged  to  General  Ex- 
penses , 1,895.65       41.87 

Remainder, $  4,045.11  $   425.52 

Wages, 1,746.55      219.22 

Board  of  Employees , 574.10 59.75 

Total, $  6,565.76  $   70"4727 

NET  PROFIT, $     69.25  *$    85.55 

*  Typed  in  red. 


EXHIBIT  "B" 


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179 


FQIUi  45 

THE  BU^.NK   COMPANY 

STATE2ffiNT   OF  CASK  RECEIPTS  AND  DISBURSELIENTS 
FOR  THE  MONTH   OF  HAY,    1920 


BALANCE   ON   DEPOSIT,    ilAY   1,    1920, $   25,476.57 

RECEIPTS: 

Accounts  Receivable, $128, 133.56 

Cash  Sales, 14,019.95 

Rentals, 650  .00 

Sale  of  Scrap, 121 .  28 

Interest  on  Bank  Balances, 267.42 

Collections  for  Telephone   Calls  37.50 

Railroad  Claims, 239  .04 

Refund  of  Overpayment  of  Ex- 
penses,    76  .09 


Total  Receipts, 145,  574.84 

Total, $169,051.51 

DISBURSEMENTS: 

Purchase   Ledger, $   76,  224 .  13 

Uages, 39,425.96 

Rent, 2,  500  .00 

Taxes, 1,916.47 

Uater, 312.92 

Contribution, 500.00 

Sundry  Expenses, 2,  319  .22 

Total   Disbursements,         123,198.70 

BALANCE   ON   DEPOSIT,    MAY  31,    1£20: 

National  Bank  of   Commerce, $   39,112.41 

Bankers  Trust   Company, 6,  740.40      $  45,852.81 


180 


FORM  46 

THE  BLANK  ASSOCIATION 

STATEMENT  OF  CASH  RECEIPTS  AND  DISBURSEMENTS 
FOR  THE  MONTH  OF  MAY,  1920,  AND  THE  SIX  HONTHS  EIIDED  MAY  31,  1920 

SIX  MONTHS 
MONTH  OF      ENDED 
MAY,  1920  MAY  31,  1920 


BALANCE  AT  BEGINNING  OF  PERIOD, $18,971.82  $  36,159.96 

RECEIPTS ■ 

General  Subscriptions, $37,484.79  $197,360.89 

Membership  Fees, 1,980.00  2,620.00 

Loans  on  Notes  Payable, 30,000.00 

Interest  on  Liberty  Loan  Bonds  and 

Bank  Balances, 348.57  1,097.48 

Employees  -  On  Subscriptions  for 

' Liberty  Loan  Bonds, 14.00 164.00 

Total  Receipts, $39,827.36  $231,242.37 

Total, $58,799.18  $267,402.33 

DISBURSEMENTS: 

Extension  Department, $8,927.72  $50,338.58 

Campaign  Department, 2,576.50  19,663.29 

Publicity  Comnittee, 4,281.73  25,066.56 

Finance  Committee, 5,029.28  21,219.17 

Fore  ign  Organizations , 3 ,  756  .  89 

Advances  for  Traveling  Expenses  (Less 
Expenditures  Transferred  to  Other 

Accounts), 550.00  1,100.00 

Conventions, 19,635.08 

Administrative, 2,171.03  13,325.53 

Central  Office: 

Salaries, 3,999.25  20,783.68 

Telephone  and  Telegraph, 5,459.59  14,865.42 

Office  Supplies, 151.07  1,483.20 

Printing  and  Stationery, 94.18  2,351.61 

Postage, 277.88  1,696.59 

Office  Equipment, 29.75  1,764.31 

Miscellaneous, 24.17  213.20 

Advances  to  Chicago  Biireau, *   538.16  1,000.00 

Chicago  Bureau  Expenses, 6,028.80  28,543.80 

Notes  Paid, 5,000.00  25,000.00 

Interest  on  Notes , 854.17  2.435.47 

Total, $44,916.96  $254,442.40 

Less  Charges  to  Expense  Accounts  as 
above  for  postage  in  excess  of  actual 

disbursements  therefor, *    30.87 891.42 

Total  Disbursements  $44,947.83  $253,550.98 

BALANCE  AT  END  OF  PERIOD, $13,851.35  $  13,851.35 


181 


FORM  47 

THE  BLAITK  PROPAGANDA  SOCIETY 

STATELIENT  OF  CASH  RECEIPTS  AND  DISBURSEMENTS 
FROM  SEPTEMBER  11,  1919,  TO  APRIL  30,  1920 


NEW  YORK   WASHINGTON 
'TOTAL      OFFICE      OFFICE 


RECEIPTS: 

Contributions: 

National  Heaidquart ere, $32,184.57  $32,184.57 

Washington, 25,091.90  25,091.90 

Special  Campaign, 15.100.00   15.100.00 

Total, $72,376.47  $72,376.47 

Advances  by  New  York  Office, $23,592.67 

Interest  on  Deposits, 12.15  12.15 

Miscellaneous, 50.55 50.55 

Total  Receipts, $72,439.17  $72,427.02  $23,604.82 

DISBURSEMENTS: 
Field  Work: 

Advances, $   520.00  $   160.00  $   360.00 

Personal  Expenses, 2,294.10  1,191.20    1,102.90 

Meeting  Expenses, 14,157.96  14,015.15      142.80 

Campaign  Expenses, 1,220.13  256.20      963.93 

Salaries, 2,458.33  1,633.33      825.00 

Display  Advertising, 455.00      455.00   

Total, $21,105.52  $17,710.89  $  3,394.63 

Literature, 15,814.06  8,235.54    7,578.52 

Office  Rent  and  Supplies, 1,573.17  641.18      931.99 

Office  Salaries, 5,176.07  3,057.36    2,118.71 

Addressing  Clerks'  Salaries, 2,054.44  2,054.44 

Office  Equipment, 941.75  425.00      516.75 

»  General  Publicity, 4,798.50  4,788.50       10.00 

Advances  to  Washington  Office, 23,592.67 

Miscellaneous, 2,518.90    1,833.80 685.10 

Total  Disbursements, $53,982.41  $60,284.94  $17,290.14 

BALANCE,  APRIL  30,  1920: 
On  Deposit: 

Guaranty  Trust  Company,  New  York, $12,142.08  $12,142.08 

Riggs  National  Bank,  Washington, 6,139.66  $  6,139.66 

On  Hand, 175.02 175.02 

TOTAL, $18,456.76  $12,142.08  $  6,314^ 

♦  Not  Including  inter-office  transfers. 
NOTE:   The  V*rashington  office  was  opened 
November  20,  1919. 


182 


FORM  48 

THE  BLANK  SOCIETY 

STATEliENT  OF  CASH  RECEIPTS  AND  DISBURSEMENTS 
FOR  THE  YEAR  ENDED  DECEMBER  31,  1919 


RECEIPTS  OF  INCOME: 

Dues, $17,100.00 

Special  Contribution  for  Payment  of  Expenses,  1,000.00 

Interest  on  Securities, 890.50 

Interest  on  Bank  Balances, 67.58 

Total, $19,058.08 

DISBURSEMENTS  OF  EXPENSES: 

Salaries, $  8,  525.16 

Printing,  Stationery,  and  Postage, 3,412.94 

Office  Rent,  Telephone,  etc., 1,967.52 

Traveling  Expenses  of  Secretary, 312.90 

Office  Equipment, 167.25 

Ann\aal  Dinner  -  Net  Cost , 1, 267 .  14 

Interest  on  Loans, 212.50 

Total, 15.865.41 

NET  INCOME, $  3, 192.67 

OTHER  RECEIPTS: 

Membership  Fees, $   600 .00 

Loan, 5, 000 .00 

Collections  from  Employees  on  Liberty  Loan 

Bond  Subscript  ions, 350.00 

Total, 5.950.00 

Total, $  9, 142.67 

OTHER  DISBURSEMENTS: 

Purchases  of  Securities, $  4,237.50 

Paurt ial  Payment  of  Loan, 3,000.00 

Total, 7.237.50 

EXCESS  OF  RECEIPTS  OVER  DISBURSEMENTS  FOR  THE  YEAR, $  1,905.17 

BALANCE,  JANUARY  1,  1919, 816.90 

BALANCE,  DECEMBER  31,  1919  -  ON  DEPOSIT  WITH  THE  EQUITABLE 

TRUST  COMPANY  OF  NEW  YORK, $  2,722.07 


I 


183 


FORIJ  49 

THE  BLANK  COLIPANY 

JOURITAL  ENTRIES   NECESSARY  TO  ADJUST   THE  BOOKS 
AS   OF   DECEMBER  31,    1919,    TO   COIIFORM  TO   EXHIBIT    "A" 


LAND, $        375.45 

TO  BUILDINGS, $   375 .45 

For  transfer  of  charge  to  the  latter  ac- 
count, August  31,  1919,  Voucher  8337. 

♦♦*♦*♦♦♦*♦♦♦♦♦♦* 

MANUFACTURING  EXPENSE, 30, 141 .30 

TO  MACHINERY, 30,141.30 

For  reversal  of  charges  by  the  Cost  De- 
partment, on  factory  orders,  to  the  latter 
accovmt,  covering  new  machines  installed 
during  the  year  1919,  as  these  machines 
had  already  been  charged  to  the  Machinery 
accoxint  direct  from  the  purchase  invoices. 
(No  adjustment  of  finished  goods  inventory 
is  considered  necessary.) 

**************** 

BUILDINGS, 3,995,45 

TO  RESERVE  FOR  DEPRECIATION  OF  BUILD- 
INGS,    3, 995.46 

For  transfer  from  the  former  account  of 
credits  on  account  of  depreciation. 

**************** 


EXHIBIT  "C"  (Continued)  -  1. 


I 

I 


184 

FORM  49 

THE  BLAinC  COMPANY 

JQURIIAL  EIJTRISS  NECESSARY  TO  ADJUST  THE  BOOKS,  ETC. 

DEPRECIATION  OF  AuTCMOBILE  TRUCKS, $  1, 250 .00 

TO  AUTOLiOBILE  TRUCKS, $  1,  250  .00 

For  reversal  of  the  entry  whereby  the 
book  value  of  an  automobile  truck  was  ap- 
preciated. 

AMORTIZATION  OF  PATENTS, 514  .48 

TO  RESERVE  FOR  AMORTIZATION  OF 

PATENTS, 514  .48 

For  correction  of  amortization  for  the 
year  1919. 


EXHIBIT  "C"  (Concluded)  -  2. 


l86 


DXt  . 

ion 

re- 

a 

3nt8, 
Unique 
Id 

ments 
at- 
n 
1  de- 


ro- 

the 


te- 
ue 


185 


FORM  50 

THE   BLANK  MERCANTILE   COHFAHY 

STATEMENT  OF  ASSETS   AND   LIABILITIES   AT  JUNE  21,    1919; 
REALIZATION   AND   LIQUIDATION   THEREOF  TO   DECEMBER  31,    1919; 
AND   ASSETS   NOT  REALIZED  AND   LIABILITIES   HOT   LIQUIDATED  AT   DECEMBER  31.    1919 

HET   INCREASE  PROFIT  OR 

BALANCE,  THROUGH  'LOSS  IK  AMOUNT 

—ASSETS—  JUIffi   21,    1919     OPERATIONS(l)         REALIZATION        REALIZED 

CASH, $       42,273.82  $38,760.91 

NOTES  RECEIVABLE, 369,081.47  •$6,750.19        290,626.53 

ACCOUNTS  RECEIVABLE: 

Customers, 312,701.78      $      5,212.90           •      3,562.43        246,817.53 

A.    B.    &   Company, 83,246.94  83,246.84 

The  C.   D.   Company, 14,297.06 

ACCRUED   INTEREST  RECEIVABLE, 1,659.26  212.95                                             1,659.28 

MERCHANDISE, 173,398.20  58,317.04        176,200.98 

lOTESTilEHT   SECURITIES: 

G.   H.    Company  First  Mortgage  Bontts, 45,078.62  891.48         45,970.10 

I.    J.    &  Company  Preferred  Stock, 12,330.89  169.11          12,500.00 

FURNITURE   AND  FI-XTURES, 2,762.50 

THE  SUCCESSOR  COMPANY 113,845.85 

TOTAL, $1,056,830.54     $119,271.70  $47,065.01     $895,782.25 


AMOUNT   TAKEN        BALANCE, 
OVER  BY  DECEMBER  31, 

SUCCESSOR  1919 


$    71,704.75 
67,534.72 

212.95 
53,514.26 

2,762.50 


$      3,512.91 


14,297.06 


113,845.85 


$195,729.16     $131,655.82 


L    I   A   B    I    L   I 


NET 
INCREASE 
BALANCE,  THROUGH 

JUNE   21,    1919     OPERATIOHS(l) 


decpj;ase 

THROUGH 
REALIZATION 

Aim 

LIQUIDATION 


AMOUNT      BALANCE, 
AMOUNT     ASSUMED  BY  DECEMBER  31, 
LIQUIDATED  SUCCESSOR       1919 


notes  payable, 

acce.''ta:ioes  payable,  . . . 
accounts  payable: 

Trade  Creditors 

K.  L.  &  Company,  Inc. 

The  la.  &  N.  Company,  . 

ACCRUED  TAXES, 

ACCRUED  SALARIES,  ETC., 

CAPITAL  STOCK, 

SURPLUS, 


$  137,649.27 
87,102.74 

106,862.61 

18,624.42 

4,376.70 

17,909.21 

3,216.47 

500,000.00 

181,089.12 


$5,215.95 


$400,000.00 
(2)  158,356.40 


$137,649.27 
56,312.68 

55,759.34 
18,624.42 

3,167.04 
15,412.72 

3,216.47 


$30,790.06 
51,093.27 


$  1,209.66 
7,713.44 

100,000.00 
22,732.72 


$1,056,830.54   $5,216.95 


$558,356.40  $290,151.94   $81,883.33  $131,655.82 


(1)  Not  Including  temporary  inoreasee  subsequently  offset  by  the 

movement  of  cash. 

(2)  Decrease  in  Surplus: 

Distributions  to  Stockholders, $175,000.00 

Expenses,   Less  Sundry  Credits, 30,421.41 

Total, $205,421.41 

Less  Net  Profit  from  Realization  of  Assets, 

as  above , 47.065.01 

Net  Decrease, $158.356.40 


Ml 


Typed  In  red. 


c 


186 

CHA.PTER  VI 

COMMENTS 

For  the  great  majority  of  accountants  the  comments  un- 
doubtedly constitute  the  most  difficult  part  of  an  audit  report. 
Even  to  those  possessing  facility  of  expression  the  preparation 
of  the  comments  is  often  very  perplexing.   This  part  of  the  re- 
port requires  the  exercise  of  judgment  and  discrimination  to  a 
degree  not  usually  dema.nded  in  the  preparation  of  the  statements, 
practically  the  sole  requirement  for  which  is  accounting  technique. 

It  may  be  stated  as  a  postulate  that  coffinients  should 
be  limited  to  essentials.   A  multiplicity  of  perfunctory  comments 
may  obscure  points  it  is  especially  desired  to  bring  to  the  at- 
tention of  the  client.   As  importance  is  relative  rather  than 
absolute,  the  determination  of  what  is  important  or  essential  de- 
mands the  exercise  of  good  judgment.   Among  things  to  be  con- 
sidered are  the  size  of  the  business;  the  familiarity  of  the 
recipients  of  the  report  with  the  practices  and  methods  of  pro- 
fessional accountants;  any  peculiar  circumstances  regarding  the 
purpose  or  object  of  the  audit;  and  what  may  be  known  of  the 
characteristics  of  the  person  or  persons  primarily  interested 
in  the  report. 

It  is  perhaps  superfluous  to  say  that  the  report 
should  usually  be  more  detailed,  as  to  both  comments  and  state- 
ments, for  a  small  business  than  for  a  large  one.   This  is  due 
not  only  to  the  fact  that  the  audit  of  a  smaller  business  is 
likely  to  be  more  detailed,  but  also  that  the  executive  of  a 


187 


large  business,  or  anyone  else  who  may  have  occasion  to  read  the 
report  on  the  company,  la  usually  intarasted  only  in  the  larger 
phases  of  its  affairs. 

When  a  report  is  addressed  to  a  person  who  is  known 
to  be  unfamiliar  with  the  methods  of  professional  auditors  it 
is  usually  desirable,  regardless  of  the  size  of  the  business, 
to  comment  in  some  detail  upon  the  extent  and  method  of  verifi- 
cation of  the  several  accounts.  Where  a  client  is  thoroughly 
familiar  with  such  matters,  as  is  usually  the  case  in  a  large 
business,  the  assertion  that  the  accounts  have  been  audited  is 
sufficient  and  it  is  unnecessary  to  go  into  detail  regarding 
the  particular  items.   However,  it  will  be  found  that  many 
clients  prefer  to  have  some  mention  made,  either  in  the  com- 
ments or  in  the  certificate,  of  the  verification  of  cash  and 
other  assets  readily  convertible  into  cash.   This  is  easily 
understood,  as  verification  of  such  items  involves  not  only  the 
integrity  of  the  accounts  but  the  honesty  of  officers  and  em- 
ployees.  In  other  words,  those  charged  with  the  custody  of 
liquid  assets  are  very  likely  to  want  the  audit  report  to  give 
them  a  clean  bill  of  health. 

The  character  of  the  comments,  no  less  than  the  state- 
ments, should  be  adapted  to  any  peculiar  features  of  the  engage- 
ment.  For  example,  if  it  be  known  that  a  report  is  to  be  sub- 
mitted to  prospective  lenders,  the  comments  should  d«3al  particu- 
larly with  current  assets  and  liabilities,  and  should  not  include 
observations  on  the  accounting  system,  information  regarding 
errors  disclosed  but  rectified,  etc.   In  a  report  designed  for  a 


188 

prospective  purchaser  of  the  business  it  is  often  appropriate  to 
include  comments  on  its  history,  organization,  and  personnel. 

When  certain  definite  information  is  sought  it  is 
usually  desirable  to  summarize  in  the  comments  the  information 
shown  by  exhibits  and  schedules,  in  order  to  bring  out  the 
salient  facts.  The  accountant  can  usually  render  considerable 
assistance  to  his  client  by  stating  his  conclusions  instead  of 
merely  furnishing  the  client  with  the  necessary  data  in  the 
form  of  statements  for  the  formulation  of  his  own  conclusions. 
This,  however,  does  not  mean  that  statement  matter  should  merely 
be  repeated. 

Regardless  of  what  might  appear  to  be  the  general  re- 
quirements in  an  engagement,  in  the  preparation  of  both  state- 
ments and  comments  recognition  should  be  given  to  any  peculi- 
arities or  even  idiosyncrasies  of  the  individuals  to  v;hom  the 
report  is  to  be  rendered.^  For  example,  it  may  be  known  that 
some  person  attaches  a  great  deal  of  importance  to  the  cash 
receipts  and  disbursements  of  a  business,  notwithstanding  that 
the  accounts  are  kept  on  an  accrual  basis.   In  that  case  it  is, 
of  course,  in  order  to  render  a  summary  of  receipts  and  dis- 
b\ir8ement8,  even  though  the  classification  of  disbursements  may 
be  practically  meaningless.   It  may  also  be  known  that  a  certain 
individual  is  especially  interested  in  some  department  of  the 
business  -  that  is,  in  fact,  his  hobby.   In  such  a  case  a  para- 
graph relating  to  the  operation  of  that  department  may  well  be 
inserted  in  the  comments. 


189 


In  most  reports  designed  to  furnish  information  to  the 
client  himself,  it  is  generally  thoxight  appropriate  to  include 
some  oomment  on  the  adequacy  of  the  accounting  system  and  the 
efficiency  of  the  office  personnel.  Of  course,  in  an  ordinary 
audit  opportxinity  is  not  usually  afforded  for  conclusive  investi- 
gation along  these  lines,  but  such  impressions  as  may  be  gathered 
are  likely  to  be  interesting  to  the  client,  especially  if  it  is 
the  first  engagement. 

In  what  order  should  comments  be  arranged.'   Since  most 
comments  relate  to  the  items  of  the  statements,  usually  explain- 
ing their  composition,  changes  in  them  during  the  audit  period, 
or  the  extent  or  method  of  verification,  it  seems  logical  to 
arrange  the  comments  in  the  order  of  the  appearance  of  the  items 
in  the  statements.  Exhibit  "A"  taking  precedence  over  Exhibit 
"B, "  etc.  Remarks  of  a  general  nature  may  then  conclude  the 
comments,  vmless  they  are  of  an  introductory  nature,  as  a  de- 
scription of  the  organization  of  the  business,  in  which  case 
they  should  be  placed  at  the  beginning  of  the  comments. 

At  this  point  it  seems  appropriate  to  state  that  the 
accountant  may  not  safely  ignore  the  importance  of  good  language 
and  style.  An  excellent  dissertation  on  this  subject  is  con- 
tained in  an  article  by  Mr.  Horatio  N.  Drury  appearing  in  "The 
Pace  Student"  for  October,  1919,  from  which  the  following  is 
quoted: 

"Paragraphs  should  be  neither  so  long  as  to 
make  it  difficult  to  grasp  the  central  idea,  nor  so 
short  as  to  give  the  impression  of  a  fragmentary  de- 


190 


velopment  of  the  thought .   In  many  paragraphs, 
short  topic  sentences,  sentences  of  summary, 
'  and  sentences  of  transition  can  be  used  to  ad- 
vantage.  Long,  ro\ind-about  sentences  should 
be  avoided.   Short,  simply  framed  sentences 
are  the  easiest  to  vmderstand,  though  as  to  the 
length  of  the  sentence,  the  principle  of  variety 
should  not  be  lost  sight  of;  and,  of  course, 
there  should  never  be  any  question  about  the 
grammatical  correctness  of  a  sentence. 

"As  for  words  and  phrases,  the  principle 
of  simplicity  obtains  here  as  well.   Heavy, 
polysyllabic  words  and  cumbersome  turns  of 
phrase  should  give  way  to  simple  idioms  and 
Anglo-Saxon  v/ords  wherever  possible.   Colloqui- 
alisms and  slang,  it  is  needless  to  say,  are 
always  out  of  place  in  a  report.   Simplicity  of 
style  never  requires  the  use  of  an  expression 
that  is  not  in  reputable  standing.  Then,  too, 
a  midway  course  should  be  steered  between  pro- 
lixity of  style,  on  the  one  hand,  and  \indue 
brevity,  on  the  other.   The  facts  should  be 
made  clear,  but  in  as  few  words  as  possible. 

"As  respects  the  tone  of  a  report,  a  few 
cautions  may  be  helpful.   Sarcasm  and  flippancy 
lower  the  tone  of  a  report  and  should  always  be 
avoided.  Dignity  and  impersonality  of  tone  are 
to  be  striven  forj  and  these  qualities  can  be 
secxired  only  when  the  accountant  expresses  him- 
self in  his  report  succinctly  and  directly,  and 
in  accordance  with  the  canons  of  good  taste. 
It  is  facts,  not  the  embellishments  of  the  facts, 
that  clients  look  for  and  must  have  if  they  are 
to  mend  their  technical  and  managerial  mistakes 
of  omission  and  commission." 

The  desirability  of  impersonality  of  expression  may 
well  be  emphasized.   The  effect  of  many  reports  has  been  spoiled 
by  the  reiteration  of  the  personal* pronoun. 

The  use  of  captions  is  an  important  feature  of  the  pre- 
paration of  text  matter  in  a  report.   Some  system  should  be 
adopted  whereby  the  reader  may  be  enabled  to  differentiate  be- 
tween principal  and  subsidiary  captions.   It  makes  little  differ- 


I 


191 

ence  how  this  is  done,  but  for  the  present  purpose  the  following 
will  be  adopted:   principal  captions  -  capitals,  centered,  double 
underscore  (hereinafter  termed  "center  captions");  subsidiary  to 
center  captions  -  capitals,  flush  with  left  margin,  without 
underscore  (hereinafter  termed  "side  captions");  subsidiary  to 
side  captions  -  capitals  and  small  letters,  indented  two  spaces 
from  left  margin,  single  underscore  (hereinafter  termed  "sub- 
side captions").   To  illustrate,  asstime  that  it  is  desired  to 
comment  upon  this  group  of  balance  sheet  items: 

INVESTMENTS, $  50,000.00 

CURRENT  ASSETS: 
Cash: 

General  Funds, $  70, 000  .00 

Coupon  and  Dividend  Ac- 

co\ints, 30,000.00 

Accounts  Receivable: 

Customers, 150, 000 .00 

Officers  and  Employees, . .    50»000.00 

Total  Current  Assets, 300,000.00 

The   following  captions  may  be   employed: 
I  IITVESTMENTS  -   $50.000.00 

CURRENT   ASSETS 

CASH 

General  Funds   -  $70,000.00 

Coupon  and  Dividend  Accounts  -  $30,000.00 
ACCOUNTS  RECEIVABLE 

Customers  -  $150,000.00 

Officers  and  Employees  -  $50,000.00 


192 


VThile  it  may  be  necessary  to  employ  as  many  captions 
as  the  above,  it  is  desirable  to  simplify  the  arrangement  as 
much  as  practicable.   In  certain  cases,  for  the  sake  of  simplici- 
ty, the  caption  Current  Assets  may  be  omitted  altogether;  or  if 
some  general  comment  on  all  of  the  constituent  items  is  made, 
or  the  coiiiment  on  each  item  is  limited  to  one  paragraph,  that 
caption  may  be  retained  and  the  subsidiary  captions  omitted. 
It  is  seldom  necessary  to  employ  the  captions  subsidiary  to 
Cash,  but  it  may  be  appropriate  to  use  them  if  there  are  ex- 
tensive comments  which  do  not  apply  to  both  items  of  Cash.   The 
same  principle  applies  to  the  captions  under  Accounts  Roceivable. 
Furthermore,  it  may  not  be  necessary  to  comment  upon  some  of  the 
items  at  all.   If,  for  exajnple,  under  the  head  of  Acco\ints  Re- 
ceivable it  is  desired  to  cover  only  the  customers'  accounts,  it 
is  wise  to  use  the  caption  "Accounts  Receivable  -  Customers  - 
$150,000.00." 

V.Tien  commenting  upon  items  appearing  in  the  balance 
sheet  or  any  other  statement  it  is  usually  well  to  include  t>^e 
amounts  of  the  items  in  the  captions,  as  above.   It  is  unneces- 
sary to  show  the  totals  of  groups  such  as  Current  Assets. 

It  is  sometimes  desirable  to  consolidate  the  presen- 
tation and  comments.   There  are  also  cases  where  it  seems  desir- 
able to  include  comments  on  particular  items  of  a  statement  as 
part  of  that  statement,  that  is,  to  make  elaborate  footnotes 
explanatory  of,  or  qualifying,  the  several  items. 

It  may  be  well  to  caution  against  making  assertions 
in  the  report  that  may  lay  the  accoiintant  open  to  prosecution  for 


1^ 

ii 


193 


libel.   This  is  a  pertinent  matter  in  connection  with  reports  on 
alleged  fraud.   In  doubtful  cases  tha  accountant  should  consult 
an  attorney,  or  be  very  careful  to  qualify  any  accusations  of 
guilt  he  may  make. 

Comments  on  Balance  Sheet  Items 
Following  is  an  outline  of  the  points  v/hich  may  be 
covered  in  fairly  complete  comments  on  the  audit  of  a  manufactur- 
ing or  mercantile  corporation: 

Cash.   Unless  the  cash  balance  is  detailed  in  the  bal- 
ance sheet,  the  comments  may  shov/  the  composition  of  the  balance, 
as  to  the  amounts  on  deposit  and  on  hand,  either  in  total  or  in 
detail.   It  is  seldom  necessary  to  give  more  detail  of  cash  on 
hand  than  the  amount  of  each  of  the  funds.   If  any  considerable 
amount  of  cash  is  represented  by  time  certificates  of  deposit, 
that  fact  should  be  disclosed  in  the  balance  sheet. 

It  should  usually  be  stated  whether  or  not  the  cash 
balances  have  been  verified,  and  if  so,  in  what  manner,  as  by 
obtaining  certifications  from  depositaries  and  by  count  of  the 
cash  on  hand  at  a  certain  date.   If  there  are  certificates  of 
deposit,  it  is  in  order  to  state  that  they  have  been  inspected. 

If  the  working  funds  at  the  time  of  the  co\int  Include 
an  inordinate  amount  of  advances  or  expense  items,  that  should 
be  brought  out  in  the  comments  unless  the  accounts  are  adjusted; 
and  even  then  it  may  be  d>J8irable  to  mention  the  condition  with 


I 


194 


respect  to  advances.  When  the  audit  is  made  some  time  after  the 
date  of  the  balance  sheet,  it  is  usxially  impossible  to  determine 
what  the  composition  of  petty  cash  funds  was  at  that  date,  but 
it  is  appropriate,  if  necessary,  to  comment  upon  the  condition 
of  the  funds  at  the  time  of  the  oo\int. 

Cash  on  deposit  for  restricted  purposes,  such  as 
interest  and  dividend  accounts,  sinking  fxind  deposits,  escrow 
deposits,  siorety  deposits,  etc.,  will  of  course  be  verified 
and  may  be  commented  upon  in  the  same  manner  as  current  funds, 
but  such  deposits  should  not  be  classified  as  current  assets 
unless  they  represent  funds  for  payment  of  current  liabilities. 

Notes  and  Acceptances  Receivable.   It  is  in  order  to 
state,  in  more  or  less  detail,  that  these  instrximents  were  in- 
spected, were  found  to  have  been  collected  subsequent  to  the 
date  of  the  balance  sheet,  or  were  otherwise  accounted  for.  If 
the  notes  are  secured  it  may  be  stated  that  the  collateral  has 
been  inspected.   If  any  of  the  items  are  past  due,  or  are  known 
to  have  been  renewed  from  time  to  time,  the  fact  should  be 
mentioned.   In  this  connection,  it  is  appropriate  to  remark  in 
the  comments  upon  the  adequacy  of  the  reserve  for  doubtful 
notes. 

Accounts  Receivable.  Accounts  receivable  should 
usually  be  plainly  designated  in  the  balance  sheet  as  to  custom- 
ers' acco\ints  and  others,  and  should  therefore  require  no  com- 
ment in  that  regard.   If  accounts  other  than  customers'  are 


195 


shown  in  one  item,  it  is  often  desirable  to  give  their  aetails 
in  the  comments,  together  with  any  necessary  remarks  regarding 
their  collectibility. 

It  should  not  be  necessary  to  state  that  the  trial 
balances  of  the  subsidiary  ledgers  have  been  checked  unless 
the  aggregate  of  the  detail  accounts  is,  or  has  been,  out  of 
balance  with  the  controlling  account.   If  the  accounts  have  not 
been  verified  except  to  the  extent  of  determining  that  the  aggre- 
gate of  the  details  has  been  fo\and  to  be  in  agreement  with  the 
amount  shown  by  the  general  ledger,  it  may  be  desirable  to  state 
the  fact . 

If  requests  for  confirmation  have  been  sent  to  debtors, 
some  information  should  be  given  in  the  comments  regarding  the 
proportion  confirmed,  both  as  to  number  of  acco\ants  so  confirmed 
and  their  amount,  and  any  important  exceptions  taken  by  the 
debtors. 

Some  comment  should  usually  be  made  on  the  condition 
of  the  customers'  accounts  with  respect  to  their  age  and  proba- 
ble collectibility  -  to  give  some  indication  of  the  actiial 
value  of  the  accounts  and  of  the  promptness  with  which  col- 
lections are  made.   For  this  purpose  it  is  seldom  necessary  to 
furnish  a  complete  tabulation  of  the  accounts  by  dates,  but  it 
is  appropriate,  in  many  cases,  to  summarize  by  periods  the 
balances  considerably  in  arrears.   For  example,  it  may  be  stated 
that  "Included  in  the  accounts  at  December  31,  1919,  are  charges 
dated  as  follows: 


196 


July  1  to  September  30,  1919, $10,000.00 

April  1  to  June  30, 1919, 5, 000 .00 

January  1  to  March  31,  1919, 2,000.00 

Prior  to  January  1,  1919, 1,000.00" 

While  such  information  as  the  foregoing  may  be  called 
for,  it  is  generally  unwise  for  an  accoiontant  to  express  an  un- 
qualified opinion  regarding  the  collectibility  of  apparently 
doubtful  accounts  without  having  discussed  them  with  the  person 
handling  credits.   It  may  be  stated  that  "The  accounts  were 
reviewed  with  the  credit  man,  in  whose  opinion  all  are  col- 
lectible", provided  the  accountant  has  no  reason  to  disagree 
with  the  credit  man;  however,  it  is  better,  if  possible,  to 
make  a  more  positive  assertion,  e.  g.:   "The  accoxints  were  re- 
viewed with  the  credit  man,  and  it  appears  that  all  but  $ 

are  collectible."  Of  course  it  is  highly  desirable,  if  possible, 
to  state  that  "The  accounts  ara  current  and  appear  to  be  col- 
lectible." 

It  is  well  to  show  a  comparison  of  the  amount  of  doubt- 
ful accoxonts  v/ith  the  amount  of  the  reserve  against  such  accounts. 

Accrued  Interest  (And  Similar  Iteir.s)  Receivable.   It 
appears  to  be  unnecessary  for  the  auditor  to  comment  upon  such 
items  \inles8  there  are  unusual  circujnstances,  as,  for  example, 
when  the  client's  computation  has  been  found  incorrect  and  not 
rectified. 

Inventories.   Unless  stated  in  the  balance  sheet, 
information  should  be  given  as  to  whether  physical  inventories 


197 

have  been  taken;  also  as  to  the  prices  used  -  whether  they  repre- 
sent cost  (actual  or  estimated),  market  values,  or  are  arbitrary. 
If  physical  inventories  have  not  been  taKen,  something  should  be 
said  regarding  the  apparent  acc\iracy  of  the  book  Inventories  as 
to  cjuantities,  and  the  system  employed  as  to  values.   Suoh 
values  usually  represent  cost,  but  they  may.  be  the  latest  cost 
or  the  avorage  cost  over  a  certain  period. 

It  is  in  order  to  state  whether  the  accountant  assvimes 
any  responsibility  for  the  quantitative  feature  of  the  inventory, 
and  the  extent  of  verification  of  computations  and  prices.   If 
there  is  any  evidence  of  the  inclusion  of  obsolete  goods  at 
full  prices  that  fact  should  be  stated. 

Securities.   It  is  appropriate  to  remark  that  securi- 
ties owned  or  held  for  others  (such  as  employees'  Liberty  Loan 
bonds)  have  been  inspected  or  have  been  confirmed  by  pledgees 
or  depositaries.   In  the  case  of  temporary  investments,  if  the 
market  value  is  materially  over  or  under  the  book  value  that 
fact  should  be  mentioned,  unless  it  is  disclosed  by  the  balance 
sheet  or  schedule.   As  to  securities  of  subsidiary  companies, 
unless  a  consolidated  balance  sheet  is  rendered,  it  is  desirable, 
if  practicable,  to  give  some  information  regarding  the  value  of 
the  securities  as  disclosed  by  the  books  or  reports  of  the  sub- 
sidiary companies. 

Sinking  Fund.   If  the  sinking  fund  provisions  of 
mortgages  are  not  being  complied  with,  the  fact  should  be  the 


198 


subject  of  oomment.  The  verification  of  securities  and  cash  in 
the  sinking  fund,  by  certification  of  the  trustee,  may  be 
mentioned. 

Property.  Unless  the  property  is  8\immarized,  in  the 
balance  sheet  or  in  a  schedule  by  classes  and  locations,  it  may 
be  well  to  give  a  summary  in  the  comments.   If  the  items  of 
such  classification  are  few,  they  are  usually  given  in  the 
balance  sheet,  and  sometimes  also  in  the  comments;  if  many, 
they  are  usually  shown  in  a  schedule  or  not  at  all.   It  is 
often  appropriate  also  to  show  a  comparison  of  the  depreciation 
reserves  with  the  corresponding  property  accounts. 

Many  clients  like  to  be  informed  regarding  the  changes 
in  the  property  accoxonts  during  the  audit  period.  The  detail  to 
which  this  is  carried  out  depends  obviously  upon  the  size  of  the 
business.   If  an  appropriation  system  is  maintained,  it  is  inter- 
esting to  compare  the  expenditures  for  additions  to  property  with 
the  amo\ints  appropriated  therefor. 

If  the  rates  of  depreciation  are  subject  to  criticism 
the  fact  should  be  noted  in  the  comments.   If  the  property  ac- 
counts have  not  been  examined  prior  to  the  current  audit  period 
it  is  in  order  to  make  a  qualifying  assertion  to  that  effect. 

Good-Will,  Patents,  Trade-Marks,  Etc.   Usually  ac- 
coiints  of  this  character  require  comment  only  in  cases  where 
some  special  interest  attaches  to  the  question  of  the  considera- 
tion given  by  the  company  for  such  assets,  where  sunortization 


199 

has  not  been  computed  correctly,  or  where  there  has  been  a  charge 
to  the  account  during  the  audit  period. 

Deferred  Charges,.   In  the  case  of  ordinary  advance  pay- 
ments of  expenses  such  as  insurance,  Interest,  and  taxes,  and 
also  In  the  case  of  such  items  as  discount  on  bonds,  no  comment 
seems  necessary  xonless  there  has  been  a  considerable  change  dur- 
ing the  period,  or  unless  there  is  an  unadjusted  difference  of 
considerable  amount  between  the  computations  of  the  accountant 
and  those  of  the  company.   As  to  expenditures  which  are  being 
amortized  over  indefinite  periods,  such  as  organization  expenses, 
or  items  held  in  suspense,  some  explanation  or  qualification  may 
be  necessary. 

Notes  and  Acceptances  Payable.   Unless  a  schedule  of 
these  liabilities  is  rendered,  showing  full  details,  it  is 
usually  appropriate  to  give  in  the  comments  some  information  re- 
garding their  maturities,  the  rate  of  interest,  ana.  any  col- 
lateral security.   The  information  may  be  given  in  the  form  of 
a  bummary .   However,  these  details  may  have  no  practical  value 
if  considerable  time  has  elapsed  between  the  date  of  the  balance 
sheet  and  the  rendering  of  the  report.  Mention  may  be  made  of 
the  verification  of  the  amounts  by  confirmation  of  the  payees, 
if  confirmations  have  been  obtained. 

Accounts  Payable.   It  is  not  necessary  in  most  cases 
to  state  that  the  detail  accounts  payable  are  in  agreement  with 
the  control.  Of  course,  if  they  are  not  in  agreement,  the  facte 


200 

should  be  stated.   If  the  balance  sheet  Item  Includes  any  con- 
siderable amount  representing  other  than  trade  aocoiints,  it  may 
be  desirable  to  shov/  its  composition  in  the  comments. 

Dividends  Payable.  It  may  be  desirable  to  give  in  the 
comments  details  of  this  item  as  to  whether  common  or  preferred, 
when  declared,  and  when  payable. 

Accrued  Accounts  (Payable) .   It  may  be  wise  in  some 
cases  to  explain  the  items  vinder  this  caption,  especially  if 
the  accountant  has  set  them  up  himself.   It  may  be  explained 
that  the  amount  of  accrued  wages  is  a  certain  proportion  of  the 
pay-roll  for  a  certain  week.   The  class  of  taxes  represented  in 
the  accrued  account  and  whether  the  liability  has  been  definite- 
ly determined  or  has  been  estimated  upon  a  certain  basis  may 
also  be  pointed  out.  Any  differences  between  the  accountant's 
and  the  compajiy's  computations  not  sufficiently  important  to 
require  rectification,  may  be  made  the  subject  of  comment. 

F\inded  Debt .   It  is  in  order  to  comment  upon  the 
verification  of  securities  issued  and  those  in  the  treasury. 
If  there  has  been  a  change  in  the  situation  during  the  period 
xinder  review  it  may  be  well  to  explain  the  chajige. 

Deferred  Credits.  The  comments,  if  any,  to  be  made 
on  these  items  will  depend  upon  the  circumstances  in  each 
particiilar  case,  the  principle  being  that  the  balance  sheet 
description  of  the  items  may  be  supplemented  by  the  comments 
for  adequate  explanation  or  qualification. 


201 

Reserves  for  Depreciation.   The  location  of  the  com- 
ments on  these  reserves  is  governed  by  the  treatment  of  the 
reserves  in  the  balance  sheet;  the  subject  should  be  covered 
under  the  head  of  the  corresponding  asset  accounts  if  the  re- 
serves are  deducted;  otherwise,  under  the  head  of  liabilities. 

The  comments  will  usually  state  the  rates  of  depreci- 
ation for  the  several  classes  of  property  and  suinmarize  any 
charges  to  the  reserves  on  account  of  replacements.   They  may 
also  state  whether  the  rates  were  applied  to  the  book  balances 
at  the  beginning  or  at  the  end  of  the  period. 

While  accountants  are  not  expected  to  be  engineers 
or  appraisers  they  are  not  warranted  in  overlooking  deficient 
or  excessive  provision  for  depreciation;  and  if  the  rates  used, 
or  their  application,  is  grossly  irregular  the  accountant  should 
protect  himself  by  a  qualification  in  the  comments,  if  not  in 
the  balance  sheet  itself.   It  may  be  mentioned  at  this  point 
that  it  is  often  appropriate  to  direct  attention  to  the  comments 
by  reference  to  them  in  the  items  of  the  statements.   This  is 
usually  done  by  the  expression,  in  parentheses,  "See  coniinents." 

Reserve  for  Doubtful  Accoimts.   The  principal  point 
to  be  covered  with  regard  to  this  reserve  is  its  adequacy  as 
indicated  by  the  review  of  the  account-  to  which  it  relates. 
It  may  also  be  desirable  to  state  the  basis  for  the  credits  to 
the  reserve  and  give  information  regarding  the  accounts  written 
off  against  it  during  the  period  xinder  review.   All  this  may 
be  appropriately  covered  under  the  caption  Accounts  Receivable. 


202 


Reserve  for  Taxes.   In  the  opinion  of  the  author,  a 
provision  for  taxos  not  du3  ia  an  accrued  liability  rather  than 
a  reserve,  and  the  only  justification  for  ev^r  treating  it  as 
a  reserve  is  on  the  ground  of  expediency.   However,  if  it  is 
shown  in  the  balance  sheet  as  a  reserve  the  coninienta  may  am.-lify 
the  description  by  explaining  for  what  taxes  provision  is  made 
and  the  basis  for  computation  or  estimate. 

Reserve  for  Sinking  Fund.   In  the  opinion  of  the 
writer,  whenever  such  a  reserve  is  encountered  the  accountant 
should  call  attention  to  the  fallacy  and  the  ultimate  effect 
of  carrying  it,  which  have  been  fully  discussed  under  the  same 
caption  in  Chapter  II. 

Reserve  for  Contingencies.   Comment  should  be  ma.de 
upon  the  necessity,  if  any,  fcr  this  reserve.   For  example,  it 
may  be  stated  that  there  is  certain  litigation  pending  or  that 
the  company  is  contingently  liable  in  respect  of  certain  en- 
dorsements or  guaranties.   Any  charges  to  the  reserve  during 
the  audit  period  should  be  explained.   Any  such  reserve  should 
be  created  by  charges  to  Profit  and  Loss  or  Surplus;  if  not, 
the  facts  should  be  clearly  stated  in  the  report. 

Capital  Stock.   Something  may  be  said  regarding  the 
verification  or  examination  of  the  capital  stock.   It  may  be 
stated  that  the  number  of  shares  outstanding  at  the  date  of 
the  balance  sheet  was  verified  by  certification  of  the  registrj-r 


203 

or  transfer  agent;  that  the  certificate  book  and  stock  ledger 
were  examined  and  foiind  to  show  the  nviniber  of  shares  called  for 
by  the  general  ledger;  or  that  the  transfers  during  the  period 
were  checked.   If  there  Is  treasury  stock  It  Is  In  order  to 
state  that  the  certificates  therefor  were  inspected. 

Any  changes  dxiring  the  period  in  the  capital  stock 
outstanding,  Issued,  or  subscribed  for  will  generally  be  com- 
mented upon.  The  consideration  received  by  the  company  for 
new  stock  Issues  may  be  mentioned. 

Surplus .  Surplus  may  appear  in  the  balance  sheet 
as  one  or  two  items.   If  the  entire  surplus  represents  earn- 
ings, it  is  usually  designated  merely  as  Surplus;  if  not,  the 
items  are  usually  described  by  some  such  terms  as  Capital 
Surplus  and  Profit  and  Loss  Surplus.  This  subject  has  been 
discussed  more  fully  in  Chapter  II. 

As  to  Capital  Surplus,  it  is  important  that  the  re- 
port give,  either  in  the  balance  sheet  or  in  the  comments, 
full  information  regarding  the  source  of  the  surplus.  The  com- 
ments should  also  furnish  an  explanation  of  any  changes  in  the 
acco\int  dxoring  the  audit  period. 

The  Surplus  or  Profit  and  Loss  Surplus  as  shown  on  the 
balance  sheet  seldom  requires  comment,  sufficient  information  be- 
ing given  in  the  supporting  Statement  of  Income  and  Profit  and 
Loss  or  in  the  summary  contained  in  the  balance  sheet  itself. 
However,  it  may  be  desirable  to  direct  the  client's  special 
attention  to  certain  charges  or  credits  for  the  period,  which 


204 

may  or  may  not  appear  In  the  statements,  or  to  furnish  certain  com- 
parative figures  or  summaries  by  percentages,  etc,  -  all  of  which  may 
appropriately  be  given  under  the  head  of  Operations.   Some  of  these 
will  be  exemplified  later. 

If  adjustments  have  been  made  in  the  preparation  of  the 
statements,  which  have  not  been  entered  on  the  books,  it  is  iVijll  to 
furnish  at  least  a  reconcilement  of  the  amounts  of  surplus  as  3ho»vn 
by  the  books  and  by  the  balance  sheet.   Such  adjustments  are  often 
shown  in  a  separate  exhibit,  in  the  form  of  journal  entries  or  other- 
wise, but  frequently  the  same  practical  object  can  be  accomplished 
in  a  more  concise  manner  by  explaining  in  the  comments  the  changes 
that  have  been  made  in  the  surplus  as  shown  by  the  books. 

Complete  Comments 
Following  appears  an  illustration  of  fairly  extensive 
comments  en  a  complete  audit  of  the  accounts  of  a  manufacturing 
corporation,  prepared  for  the  sole  purpose  of  exemplifying  the 
treatment  of  specific  subjects  and  without  any  regard  for  cohesion 
or  consistency. 

JOHN  DOE  &  COiMPAnY,  INC. 

COIdi.lENTS  ON  THE  AUDIT 
FOR  THE  YEAR  ENDED  DECEMBER  51,  1919 

CASH  -  $10,549.27 
The  cash  balance  at  December  31,  1919,  consisted  of  the  following: 

On  hand: 

New  York  office, $   500.00 

Chicago  office, 100.00 

On  deposit : 

Hanover  National  Bank,  New  York, 5,  526  .59 

First  National  Bank,  Chicago, 2,422.68 

In  transit  from  Chicago  to  New  York, 2,000.00 

Total, $10, 549.27 


205 

The  cash  on  hand  at  New  York  was  verified  by  count  on 
January  6,  1920.   The  Chicago  working  fund  was  not  verified  ex- 
cept by  reference  to  a  report  from  that  office.  The  balances  on 
deposit  were  verified  by  certifications  obtained  from  the  banks, 
and  the  cash  in  transit  was  found  to  have  been  deposited  in 
New  York  on  January  3,  1920. 

VTe  suggest  that  consideration  be  given  to  restoring 
to  the  cash  account  the  amounts  of  several  pay-roll  checks  which 
have  been  outstanding  for  more  than  three  years.  V/e  understand 
that  the  payees  have  left  the  employ  of  the  Company  and  that  no 
claim  for  payment  has  been  made. 

WORKING  FUNDS  -  $2,000.00 

The  working  funds  are  in  the  hands  of  salesmen,  as 
evidenced  by  their  reports  on  file. 

All  expenses  had  been  cleared  at  December  31,  1919,  but 
as  reports  are  made  weekly  it  frequently  happens  that  expenses 
are  not  charged  in  the  proper  month.  We  suggest  that  reports  be 
made  on  the  10th,  20th,  and  last  day  of  each  month. 

NOTES  AND  ACCEPTANCES  RECEIVABLE  -  $25,652.74 
The  notes  and  acceptances  at  December  31,  1919,  were 
inspected  by  us,  with  the  exception  of  those  which  had  been  col- 
lected from  January  1  to  15,  1S20.  All  are  trade  obligations, 
but  two  notes,  aggregating  $1,046.27,  are  past  due.  We  are  in- 
formed that  these  are  regarded  as  collectible. 


I 


106 


ACCOUNTS  RECEIVABLE 
CUSTOMERS  -  $105,326.27 

The  customers  were  not  requested  to  confirm  their  balances. 
The  accounts  were  reviewed  in  detail  and  were  discussed  with  the 
Treasurer  as  to  their  collectibility.   It  appears  that  the  probable 
losses  will  not  exceed  $5,000.00,  which  is  well  within  the  amount 
of  the  reserve  provided  for  that  purpose. 

OTHERS  -  $5,976.43 

These  accounts  are  as  follows: 

C.  D.,  employee  -  loan,. $1,000.00 

Sundry  employees  -  on  account  of  Liberty  Loan 

bond  subscriptions, 3,  250.00 

Debit  balances  in  Accounts  Payable  ledger, 

representing  overpayments, 427.56 

Railroad  claims, 1,298.87 

Total, $5,976.43 

The  loan  to  C.  D.  is  secured  by  a  life  insurance  policy 
for  $3,000.00  assigned  to  the  Company,  the  cash  surrender  value  of 
which  is  $1,126.47.   Interest  is  being  charged  on  the  loan  at  Sfo. 

The  amount  of  $3,250.00  due  from  employees  on  their  sub- 
scriptions for  Liberty  Loan  bonds  was  found  to  be  supported  by  the 
detail  records.  Following  is  a  summary  of  the  accounts  represent- 
ing employees'  subscriptions  which  had  not  been  closed  at  December 
31,  1919: 

Third     Fourth   Victory 
Total      Loan      Loan     Loan 

Bonds  subscribed  for  by  em- 
ployees and  purchased  by 

the  Company, $20,000.00  $5,000.00  $7,000.00  SB,  000.00 

Payments  by  employees, 16,750.00  4,750.00  6,500.00   5,500.00 

Balance  due  from  employees,  3,250.00  250.00  500.00  2,500.00 
Bonds  delivered  to  employees  16,500.00  4,700.00  6,400.00  5,400.00 
Bonds  held  for  delivery  upon 

completion  of  payments, .    3,500.00    300.00    600.00   2,600.00 


207 

We  inspected  the  bonds  held,  aggregating  $3,500.00,  as 
shovm  above . 

The  railroad  claims  are  current,  excepting  two  aggregat- 
ing $325.46,  which  were  filed  in  1918  and  which  have  not  been, 
prosecuted  as  diligently  as  possible.  All  of  the  claims  appear 
to  be  valid. 

MARKETABLE  SECURITIES  -  $93,000.00 
The  securities  carried  as  temporary  investments  are  as 
follows: 

Par  Value  Book  Value 

United  States  Liberty  Loan  bonds  and 
notes: 

Second,  4/^, $25,000.00  $23,800.00 

Fourth,  4-1/4^, 20,000.00   19,200.00 

Victory,  4-3/4fo, 25,000.00   25,000.00 

United  S+ates  Treasury  4-1/2^  Certificates 

of  Indebtedness,  due  May  15,  1920, 25,000.00   25,000.00 

Total, $95,000.00  $93,000.00 

The  above  book  values  represent  cost.  The  securities 
were  inspected  by  us,  with  the  exception  of  the  Victory  Loan 
notes,  which  are  pledged  as  security  for  a  note  payable  of 
$20,000.00. 

INVENTORIES  -  $325,167.29 


Physical  inventories  of  finished  goods,  work  in  process, 
and  materials  and  supplies  were  taken  by  employees  of  the  Company 
as  of  December  31,  1919,  and  priced  at  cost  as  shown  by  the 
records. 


208 


The  book  costs  of  finished  goods  appear  to  be  slight- 
ly excessive,  as  credits  to  the  Finished  Goods  Inventory  account 
during  the  year  based  upon  such  costs  resulted  in  a  reduction 
of  the  book  inventory  at  the  end  of  the  year  to  approximately 
$50,000.00  below  the  physical  inventory,  which  amount  is  about 
3fo  £)f   the  recorded  cost  of  goods  sold.   However,  any  over- 
valuation of  finished  goods  is  probably  fully  offset  by  an 
undervaluation  of  work  in  process,  in  the  pricing  of  v;hich  no 
consideration  is  given  tc  factory  overhead  expenses.   'Te  recom- 
mend that  the  unit  costs  established  for  finished  goods  be 
reviewed  with  a  view  to  their  reduction  in  some  cases,  and 
that  hereafter  in  the  valuation  of  work  in  process  all  elements 
of  factory  cost  be  included. 

The  inventory  prices  of  materials  and  supplies,  and 
the  computations  of  all  inventories,  were  tested  by  us. 

i:tvestiae::ts  -  $125,541.89 

The  certificates  for  the  1,000  shares  of  capital 
stock  of  the  E.  F.  Company  (the  entire  issue)  were  examined  by 
us.  V.'e  have  not  audited  the  accoiints  of  that  Company,  but  a 
report  on  file  shows  a  surplus  of  $32,659.87  at  December  31, 
1919,  and  net  income  of  $20,000.00  for  the  year  1919.  Divi- 
dends amounting  to  lOf^,  $10,000.00,  were  received  during  the 
year. 

The  item  Real  Estate,  $25,341.89,  represents  business 
property  in  Bridgeport,  Connecticut,  which  was  taken  over  during 


I 


209 

the  year  in  settlement  of  notes  receivable  and  interest,  aggre- 
gating the  amoiint  at  which  the  property  is  valued.  The  deed  to 
the  property  was  examined 

SINKING  FUND  -   $58,347.65 
The   securities  and  cash  in  the   sinking  fund  at 

December  31,    1919,    were  verified  by   certification  obtained  from 

the  trustee. 

Following  is  a  summary  of  the  cash  transactions  of  the 

trustee  during  the  year: 

Balance  uninvested,  January  1,  1919, $   678.24 

Paid  by  the  Company,  in  accordance  with 

the  terms  of  the  mortgage, 12.500.00 

Total, $13,178.24 

Purchases  of  the  Company's  bonds  - 

$13,000.00  at  95ffl, 12.350.00 

Balance  iininvested,  December  31,  1919,...;  $   828.24 

The  discoxint  of  $650.00  on  the  bonds  purchased  during 
the  year  was  credit ied  to  Profit  and  Loss,  as  shovm  by  Exhibit 
"B." 

PROPERTY  (less  reserves  for  depreciation)  -  $226,000.00 
We  examined  the  larger  entries  in  the  property  ac- 
counts from  the  organization  of  the  Company  in  1910,  and  audited 
in  detail  the  entries  during  the  year  1919.  Except  as  other- 
wise noted,  the  balances  appear  to  represent  the  cost  of  the 
property  now  in  service. 

The  property  is  avimmarized  by  locations  and  book 
values  as  follows: 


I 


210 

Total       Chicago       Boston     New  York 

Land, $75,000.00  $50,000.00  $25,000.00 

Buildings, 125,000.00  75,000.00  50,000.00 

Machinery  and  fac- 
tory equipment,..  100,000.00  50,000.00  30,000.00  $20,000.00 

Automobiles,  horses, 

and  wagons, 5,000.00  2,000.00  1,000.00    2,000.00 

Offic'e  furnitxire 

and  appliances,  . .  5,000.00 1,000.00 1,000.00    3,000.00 

Total, $310,000.00  $178,000.00   $j.07, 000.00   $25,000.00 

LAND 

The  book  value  of  the  land  at  Chicago  was  appreciated 
$20,000.00  during  the  year  1916  by  credit  to  surplus.  We  are  informed 
that  this  action  was  based  upon  an  independent  appraisal,  and  that  the 
present  valuation,  $50,000.00,  is  regarded  as  conservative. 

BUILDINGS 

During  the  year  1919  a  new  foiindry  building  was  constructed 
at  Boston,  at  a  cost  of  $15,000.00,  which  is  $2,500.00  in  excess  of 
the  appropriation  by  the  Directors. 

Considerable  improvements  were  made  to  the  Chicago  machine 
shop  building  and  were  charged  to  the  Repairs  account.  Attention  is 
directed  to  the  fact  that  under  the  Federal  income  tax  law  such 
charges  cannot  properly  be  treated  as  expenses;  they  should  there- 
fore be  capitalized  and  written  off  by  periodical  depreciation. 

MACHINERY  AND  FACTORY  EQUIPMENT 

The  entries  in  these  accounts  during  the  year  1919  are 
summarized  as  follows: 


211 

Chicago  Boston 

Charges: 

Generator  and   Installation, $10,000.00 

Lathes, 3,000.00      $2,000.00 

Miscellaneous  new  equipment, 1.000.00            500.00 

Total, $14,000.00     $2,500^00 

Credits: 

Sale  of  old  lathes, $   500.00  $  300.00 

Loss  on  old  lathes,  charged  to  Reserve  for 

Depreciat  ion, 1,500.00   1.200.00 

Total, $  2,000.00   $1,500 ."00 

Net  Increase, $12,000.00  $1,000.00 

AUTOMOBILES,  HORSES,  AND  WAGONS 

The  only  change  in  these  accounts  diiring  the  year  1919  was 
for  the  purchase  in  New  York  of  a  new  truck  for  $1,000.00,  an  old 
truck  which  cost  $800.00  being  turned  in  as  part  payment  at  a  valua- 
tion of  $300.00.  The  net  charge  to  the  acco-unt  was  $700.00,  no  con- 
sideration having  been  given  to  the  loss  of  $500.00  on  the  old  truck. 
This  account  should,  therefore,  be  credited,  and  the  corresponding 
Reserve  for  Depreciation  charged,  with  $500.00.  V/e  have  made  no  ad- 
justment, as  we  are  informed  that  the  matter  will  be  rectified  on 
the  books  in  the  month  of  January,  1920. 

RESERVES  FOR  DEPRECIATION 

Following  is  a  summary  of  these  reserves  at  December  31, 

1919,  and  the  rates  of  depreciation  for  the  year  1919,  applied  to  the 

balances  of  the  respective  property  accounts  at  the  beginning  of  the 

year: 

Per 
Amount    Cent 

Buildings, $20, 000 .00  2-1/2 

Machinery  and  factory  equipment, 60,000.00   10 

Automobiles,  horses,  and  wagons, 2,500.00   20 

Office  furniture  and  appliances, 1,500.00   10 

Total, $84,000.00 


212 

The  rate  of  depreciation  of  machinery  and  factory  equipment 
appears  to  be  excessive,  as  the  amount  of  the  reserve  is  now  50^  of 
the  gross  book  value,  and  a  considerable  part  of  the  machinery,  etc., 
is  comparatively  new. 

We  recommend  that  the  reserve  accounts  be  analyzed  by  loca- 
tions, and  that  separate  reserves  be  carried,  corresponding  to  the 
asset  accounts. 

PATENTS  -  $114.000.00 

The  cost  of  patents  has  been  amortized  by  charging  to  ex- 
penses each  year  l/17th  of  the  original  valuation.  Consideration  has 
not  been  given,  however,  to  the  proportion  of  value  expired  at  the 
time  certain  patents  were  acquired. 

The  original  and  present  book  values  of  the  several  patents, 
and  the  amounts  written  off  as  amortization,  are  as  follows: 


Pat  ent 

"A" 
"3" 
"C" 

"D" 

Original 
Valuation 

$   38,000.00 
51,000.00 
34,000.00 
17,000.00 

Amort: 

1919 

$  4,000.00 
3,000.00 
2,000.00 
1,000.00 

Ization 

Total 

$24,000.00 

27,000.00 

4,000.00 

1,000.00 

Present 
Valuation 

$  44,000.00 
24,000.00 
30,000.00 
13,000.00 

Total, . . 

$170,000.00 

$10,000.00 

$56,000.00 

$114,000.00 

The  correct  amortization  for  the  year  1919,  and  to  December 
31,  1919,  is  computed  as  follows: 


Patent 

"A" 
"3" 
"C" 
"D" 

Year 

of 

Purchase 

1913 
1910 
1917 
IS  18 

Year 
of 
Expir- 
ation 

1923 
1927 
1932 
1935 

Total, 

Per 

Anntim 

1/10 
1/17 
1/15 
1/17 

, . .  Amort izaxio. 

Year 
1919 

$  6,800.00 
3,000.00 
2,266.67 
1,000.00 

n 

To  Decem- 
ber 31, 
1919 

$40,800.00 

27,000.00 

4,533.33 

1,000.00 

.      $13  ,=  066. 57 

$73,333.33 

213 


From  the  foregoing  it  will  be  seen  that  the  book  value 
of  patents  should  be  reduced  $17,333.33  as  of  December  31,  1919, 
of  which  amount  $3,066.67  is  chargeable  against  the  income  for 
the  year  ended  on  that  date.  Ho  adiustment  of  this  difference 
has  been  made  by  us,  but  we  recommend  that  the  accounts  be  cor- 
rected during  the  year  1920. 

DEFERRED  CHARGES 
TAXES  PAID  IN  ADVANCE  -  $2,000.00 

The  balance  of  this  account  on  the  books  is  $500.00.  We 
have  made  an  adjxistment,  as  shown  in  Exhibit  "C",  setting  up  the 
proportion,  $1,500.00,  of  Federal  capital  stock  tsuces  for  the  year 
ending  June  30,  1920,  paid  in  advance  at  December  31,  1919. 

UNAMORTIZED  DISCOUNT  ON  BONDS  -  $36,000.00 

Following  is  a  summary  of  this  account  for  the  year: 

Balance,  January  1,  1919, $28, 400.00 

Discount  on  $200,000.00  first  mortgage 

bonds  sold  at   95, 10.000.00 

Total, $38,400.00 

Less  amortization  -  charged  to  income,...  2,400.00 

Balance,    December  31,    1919, $36,000.00 

This  balance  of  $36,000.00  represents  the  proportion  of 
the  total  discount,  $48,000.00,  applicable  to  the  remaining  term 
of  the  bonds,  fifteen  years. 

REAL  ESTATE  OPTION  -  $500.00 

This  item  represents  a  payment  for  an  option  to  pur- 
chase certain  real  estate,  which  expires  February  15,  1920.  We 


214 
are  informed  that  the  company  does  not  expect  to  exercise  its  option. 

UNAMORTIZED  ORGANIZATION  EXPENSES  -  $10,000.00 

The  organization  expenses,  which  originally  amounted  to 
$40,000.00,  sue  being  amortized  by  charges  to  Profit  and  Loss  of 
$5,000.00  per  annum. 

NOTES  AND  ACCEPTANCES  PAYABLE  -  $121.346.27 
These  liabilities  are  summarized  by  payees  and  matTirities 
as  follows: 

Bank  loans: 

Guaranty  Trust  Company,  New  York  -  February,  1920,..  $  50,000.00 
Old  Colony  Trust  Company,  Boston: 

January,  1920, $25,  000 .00 

Ma^ch,  1920, 25,000.00    50,000.00 

Trade  acceptances  -  January  and  February,  1920, 21,346.27 

Total, $121,346.27 

The  amounts  of  the  bank  loans  were  confirmed  by  the 
payees.   Interest  on  those  loans  is  at  the  rate  of  5-1/2^. 

ACCOUNTS  PAYABLE  -  $237,925.20 
The  composition  of  accounts  payable  at  December  31,  1919, 
is  as  follows: 

Unpaid  Vouchers: 

Balance  of  general  ledger  account, $215,346.94 

Debit  balances  included  therein  treated 

by  us  as  accounts  receivable, 4,56^.94  $219,909.38 

Credit  balances  in  accounts  receivable  treated  by  us 

as  accounts  payable, 2,963.47 

Purchase  invoices  not  vouchered,  but  materials  in- 
cluded in  inventory  -  adjustment  as  shown  in 
Exhibit  "C", 12,427.32 

Taxes  due,  transferred  by  us  from  Accrued  Taxes, 2, 624.53 

Total, $237,925.20 


215 

The  net  credit  balances  of  xinpald  vouchers  as  shoivn  by 
the  detail  records  aggregated  $215,637.81,  or  $290.87  more  than 
the  balance  of  the  controlling  account  in  the  general  ledger. 
This  difference  has  not  been  thoroughly  investigated  by  us,  but 
it  appears  that  the  controlling  accoxint  is  correct.  V7e  recom- 
mend that  the  entries  for  payments  of  vouchers  from  October  1  to 
December  31,  1919,  be  checked  as  soon  as  possible.   It  was  noted 
that  there  are  several  vouchers  entered  in  1918  which  have  not 
been  paid.   As  to  two  of  these,  viz.,  #324t,  $125.00,  and  #5964, 
$78.52,  no  explanation  could  be  given.  These  matters  should  be 
investigated. 

ACCRUED  WAGES  -  $5,427.23 
As  the  oompany,  in  closing  its  accounts,  does  not  take 
into  consideration  accrued  wages,  we  have  set  up  a  liability  for 
one-half  of  the  pay-roll  for  the  week  ended  January  3,  1920. 

ACCRUED  INCOME  AND  EXCESS  PROFITS  TAXES  -  $25,000.00 
The  amoxint  of  this  accrual  represents  the  company's 
estimate  of  Federal  taxes  for  the  year  ended  December  31,  1919. 
The  company  will  join  in  a  consolidated  tax  return  with  other 
companies  controlled  by  the  same  interests,  and  we  are  therefore 
xmable  to  verify  the  adequacy  of  the  provision. 

FIRST  MORTGAGE,  dfo   BONDS  -  $500,000.00 
The  amoxint  of  bonds  outstanding  at  December  31,  1919, 
was  verified  by  certification  obtained  from  the  trustee. 


216 


During  the  year,  $200,000.00  of  bonds  were  executed  arid 
sold  at  95.   This  completed  the  authorized  issue. 

RESERVE  FOR  DOUBTFUL  ACCOUIITS  -  $8,250.00 
The  balance  of  this  reserve  increased  $3,250.00  during 
the  year,  as  follov/s: 

Credits: 

Provision  -  1^^  of  gross  sales,  $10,000.00 

Recoveries  on  accounts  pre- 
viously written  off, 850.00  $10,850.00 

Charges  -  imcollectible  accoxonts  written 

off, 7,600.00 


Net  Increase, $  5,250.00 

RESERVE  FOR  CONTINGENCIES  -  $100,000.00 
This  reserve  was  established  during  the  year  to  provide 
against  any  loss  that  may  be  sustained  through  a  possible  adverse 
decision  in  a  pending  suit  against  the  company  for  damages  of 
$75,000.00  for  alleged  infringement  of  a  patent.  We  are  informed 
by  the  President  that  the  amount  of  $100,000.00  is  ample  provi- 
sion for  any  contingency  that  may  arise  v/hich  is  not  otherwise 
specifically  provided  for. 

PREFERRED  CAPITAL  STOCK  -  $500,000.00 
CQ2JM0N  CAPITAL  STOCK  -  $575,000.00 

The  number  of  shares  of  preferred  and  common  capital 
stock  issued  at  December  51,  1919,  v/as  verified  by  certification 
obtained  from  the  registrar. 

During  the  year  100  shares  of  treasury  common  stock 
were  sold  at  par,  for  cash.  Certificates  for  the  250  shares  re- 


217 


maining  in  the  treasury  at  December  31,  1919,  were  inspscted  by 
us . 

INCREASE  IN  CAPITAL  EMPLOYED  IN  THE  BUSINESS 
The  capital  employed  in  the  business  was  increased 
$128,018.67  during  the  year,  as  follov/s: 

Increase  in  assets: 

Current  assets,  less  reserves  against 

accounts  receivable, ".  .  , $227,  652 .49 

Investments, 34,  958 .00 

Property,  less  reserves  for  depreciation,  3,247.65 

Deferred  charges, 1,920.59 

Total, $257,778.73 

Less  increase  in  liabilities  and  reserve 

for  cont ingencies, 139,  760.06 

Net  increase  in  capital  employed  in  the 

business, $128,018.67 

Derived  from: 

Increase  in  capital  stock  outstanding,..   $  10,000.00 

Surplus  for  the  year,  after 
providing  for  deprecia- 
tion, estimated  Federal 
taxes,  and  contingencies, .  $168,018.67 

Less  dividends  declared  and 

paid, 50,000.00    118,018.67 

'Total, $128,018.67 

OPERATIONS 

Follov/ing  are  the  percentages  of  increase  in  some  of 

the  major  items  of  Exhibit  "B"  for  the  year  1919,  as  compared 

with  the  corresponding  items  for  the  year  1918: 

Per  Cent . 

Net  sales, 25.47 

Cost  of  goods  sold, 15.63 

Gross  profit, 69 . 33 

Selling  expenses, 6 .  52 


218 


General  expenses: 

Salaries, 11 .  13 

Other, 4 .  32 

Profit  from  operations, 96.59 

Income  credits, 8.56 

Income  charges, 17 .95 

Net  income, 126 .  17 

The  increase  in  the  number  of  implements  sold  during 
the  year,  as  compared  with  the  preceding  year,  was  1249,  or  5.27^. 

The  approximate  turnover  of  finished  goods  and  materi- 
als during  the  years  1919  and  1918  is  shown  as  follows: 

1919        1918 

Finished  goods  inventory: 

Beginning  of  year, $150,000.00  $100,000.00 

End  of  year, 200, 000 .00  150, 000 .00 

Average, 175,000.00  125,000.00 

Cost  of  goods  sold, 700,000.00  625,000.00 

Turnover  of  finished  goods  -  times, 4  5 

Raw  materials  inventory: 

Beginning  of  year, 50,000.00  30,000.00 

End  of  year, 70,000.00  50,000.00 

Average, 60,000.00  40,000.00 

Value  of  materials  in  goods  manufactured  300,000.00  240,000.00 

Turnover  of  raw  materials  -  times, 5  6 

The  comparatively  slow  movement  of  stocks  of  finished 
goods  and  materials  during  the  year  1919,  as  shown  above,  vi^hich 
is  due  to  xinsettled  labor  and  transportation  conditions,  undoubt- 
edly explains  to  a  large  degree  the  increase  in  interest  charges 
during  the  year. 

INSURANCE 
The  fire  insurance  in  force  at  December  31,  1919,  was 
as  follows: 


219 


Buildings, $100,000.00 

Machinery  and  other  equipment   100,000.00 
Merchandise, 200,000.00 

The  inventory  value  of  merchandise  at  that  date  v/as 
approximately  $325,000.00.   As  the  policies  carry  the  80/o  co- 
insurance clause,  in  event  of  partial  loss  the  company  could  re- 
cover only  about  10/13  of  such  loss. 

While  the  insurance  on  buildings,  machinery,  etc.,  is 
adequate  to  reimburse  the  company  for  the  cost  of  the  property 
less  depreciation,  that  is,  the  net  book  value,  it  is  probable 
that  the  company  is  not  protected  to  the  amoxint  of  the  replace- 
ment value  of  the  property,  in  view  of  the  advance  in  costs. 
We  recommend  that  this  matter  be  investigated.   It  may  be  advis- 
able to  have  the  property  appraised. 

The  liability  insurance  carried  appears  to  be  adequate. 

QEIJERAL 

We  did  not  have  access  to  the  minutes  of  the  meetings 
of  stockholders  and  directors. 

The  accounts  and  records  are  well  kept  with  the  excep- 
tion of  the  voucher  register;  as  to  that,  v;e  are  informed  that 
there  are  extenuating  circomstances.   The  accounting  system  ap- 
pears to  be  subject  to  criticism  only  in  respect  of  the  lack  of 
co-ordination  between  the  general  accounting  and  cost  records. 
In  our  opinion  the  cost  system  should  be  made  an  integral  part 
of  the  general  accounting  schemo. 

:ti   *   >«[   :|<   :ti 


220 

Condensed  Comments 
The  follov/ing  is  a  condensation  of  the  complete  com- 
ments immediately  preceding,  prepared  upon  the  assumption  that 
the  client  is  not  himself  interested  in  most  of  the  information 
contained  therein,  and  that  he  desires  to  submit  the  report  to  a 
prospective  lender. 

JOHN  DOE  &  COMPANY,  INC. 

COLO-IENTS  ON  THE  AUDIT 
FOR  THE  YEAR  ENDED  DECEMBER  31,  1919 

GENERAL 
All  the  usual  and  necessary  verifications  of  the  ac- 
coxints  incident  to  a  complete  audit  were  made  by  us,  except  that 
we  did  not  have  access  to  the  minute  book. 

NOTES  AND  ACCEPTANCES  RECEIVABLE 
ACCOUNTS  RECEIVABLE 

The  notes  and  acceptances  are  all  trade  obligations, 
and,  with  the  exception  of  $1,046.27,  none  is  past  due.   The 
customers'  accovmts  are  reasonably  current.   It  appears  that 
such  loss  as  may  be  sustained  in  the  collection  of  any  of  these 
items  will  not  exceed  the  amount  provided  in  the  reserve  for 
doubtful  accoxonts. 

Of  the  $5,976.43  of  accounts  receivable  other  than 
with  customers,  $4,250.00  represents  secured  advances  to  em- 
ployees and  $1,298.87  represents  claims  against  railroads. 


221 

MARKETABLE  SECURITIES 
These  securities  are  as  follows: 

United  States  Liberty  Loan  bonds  and  notes, 

par  value  $70,000.00  -  cost, $68,000.00 

United  States  Treasury  4-1/2^  Certificates 
of  Indebtedness,  due  May  15,  1920  -  par 
value , 25,000.00 

Total, $93,000.00 

United  States  Victory  Loan  notes  amounting  to  $25,000.00 
are  pledged  as  collateral  to  a  note  payable  of  $20,000.00. 

INVENTORIES 
Physical  inventories  of  finished  goods,  work  in  process, 
and  materials  and  supplies  were  taken  by  employees  of  the  company 
as  of  December  31,  1919,  and  priced  at  cost  as  shov/n  by  the 
records.  The  computations  were  verified  by  us,  and  the  prices 
found  to  be  approximately  correct. 

INVESTMENTS 

The  company  ovms  all  the  stock  of  the  E.  F.  Company, 
which  is  carried  at  par  value,  $100,000.00.  V7e  have  not  audited 
the  accounts  of  that  company,  but  a  report  on  file  shows  a  sur- 
plus of  $32,559.87  at  December  31,  1919,  and  net  income  of 
$20,000.00  for  the  year  1919,  one-half  of  which  was  paid  in 
dividends. 

The  real  estate  carried  as  an  investment  is  business 
property  in  Bridgeport,  Connecticut,  which  was  taken  over  in 
settlement  of  a  debt,  at  the  amount  of  which  the  property  is 
carried  on  the  books. 


222 


PROPERTY 
The  company  has  been  conservative  in  its  capital 
charges  and  provision  for  depreciation.   It  appears  that  the 
gross  book  values  do  not  exceed  the  cost  of  the  property,  except- 
ing the  land  at  Chicago,  valued  on  the  books  at  $50,000.00, 
which  includes  $20,000.00  representing  appreciation  in  the  year 
1916. 

PATENTS 
The  company's  patents  are  carried  on  the  books  at 
cost  less  amortization.  However,  in  the  computation  of  amor- 
tization consideration  has  not  been  given  to  the  proportion  of 
value  expired  at  the  time  certain  patents  were  acquired.  Ad- 
justment of  these  errors  would  effect  a  reduction  of  $17,333.33 
in  the  book  value  at  December  31,  1919,  and  of  $3,066.67  in  the 
net  income  for  the  year  1919  as  shovm  by  Exhibit  "B." 

NOTES  AND  ACCEPTANCES  PAYABLE 
The  notes  and  acceptances  payable  are  summarized  by 
classes  and  maturities  as  follov/s: 


Bank  loans: 

January,  1920, $  25,000.00 

February,  1920, 50, 000 .00 

March,  1920, 25,000.00 

Trade  acceptances  -  January  and  February, 

1920, 21,346.27 


Total, $121,346.27 


223 

ACCRUED  INCOME  AND  EXCESS  PROFITS  TAXES 
The  amount  of  this  accrual  represents  the  company's 
estimate  of  Federal  taxes  for  the  year  ended  December  31,  1919. 
The  company  will  join  in  a  consolidated  tax  return  with  other 
companies  controlled  by  the  same  interests,  and  we  are  therefore 
linable  to  verify  the  adeq^uacy  of  the  provision. 

RESERVE  FOR  CONTINGENC'lES 
V/e  are  informed  by  the  President  of  the  company  that 
the  amoxint  of  this  reserve,  $100,000.00,  is  ample  provision  for 
any  contingency  that  may  arise  v/hich  is  not  otherwise  specifical- 
ly provided  for.  The  only  contingency  which  has  been  brought  to 
our  attention,  other  than  on  accoiint  of  discounted  notes  receiv- 
able, as  shovm  in  Exhibit  "A, "  is  a  suit  against  the  company  for 
damages  of  $75,000.00  for  alleged  infringement  of  a  patent. 


224 

CPIAPTER  VII 
CERTIFICATES 

G2:iERAL  REUARICS 

Formal  certificates  in  an  audit  report  may  be  made  a 
separate  part  of  the  report,  or  may  be  appended  to  the  balance 
sheet  or  other  statement,  or  may  form  a  part  of  the  presentation, 
depending  upon  the  circiomstances  of  the  case.   It  has  been  the 
exi^erience  of  the  author  that  when  the  client  desires  a  formal 
certificate  he  usually  wants  it  short  and  concise.  This  appears 
to  be  a  good  reason  for  separating  the  certificate  from  the  pre- 
sentation or  comments.   If  a  complete  audit  has  been  made,  and 
t>vo  or  more  statements  are  included  in  the  report,  it  will 
generally  be  foiind  preferable  to  render  the  certificate  separate- 
ly.  If  only  one  statement  is  rendered,  as  in  a  balance  sheet 
audit,  it  is  usually  desirable  to  append  the  certificate  to  the 
statement  certified. 

VARIETY  OF  FORMS 

Following  is  a  simple  form  of  separate  certificate: 

JOHN  DOE  &   COMPAI'IY 

CERTIFICATE  OF  AUDIT 

I  have  audited  the  accounts  of  Joim  Doe  &  Company  for  the 
year  ended  December  31,  191S,  and 

I  HEREBY  CERTIFY  that,  in  my  opinion,  the  accompanying  Bal- 


225 

ance  Sheat  as  of  December  31,  1919,  and  Statement  of  Income  and 
Profit  and  Loss  for  the  year  ended  that  date  are  correct. 

(signed)  Richard  Roe 

Certified  Public  Accountant. 


New  York,  v 

March  10,  1920. 

Material  qualifications  regarding  the  verification  of 
accounts  should  be  embodied  in  the  certificate,  as  the  client  is 
Justified  in  publishing  the  certificate  without  the  accompanying 
comments.   If  no  specific  qualifications  are  included,  the  only 
alternative  is  to  insert  in  the  certificate  "subject  to  the  ac- 
companying comments".   But  this  is  very  tmsatisfactory .   Follow- 
ing is  a  form  exemplifying  the  inclusion  of  specific  qualifica- 
tions in  the  certificate  rendered  separately: 

New  York,  March  10,  1920. 

Mr.  John  Doe, 

President,  John  Doe  &  Company,  Inc., 

New  York. 
Dear  Sir: 

I  have  audited  the  accounts  of  John  Doe  &  Company,  Inc., 
for  the  year  ended  December  31,  1919,  and 

I  HEREBY  CERTIFY  that,  in  my  opinion,  subject  to  no 
provision  having  been  made  for  depreciation  of  propsrty  or  for 


226 


Federal  taxes  for  the  year,  the  accompanying  Balance  Sheet  and 
Statement  of  Income  and  Profit  and  Loss  correctly  exhibit,  re- 
spectively, the  financial  condition  of  the  Company  at  December 
31,  1919,  and  the  results  of  its  operations  for  the  year  ended 
that  date. 

(signed)  Richard  Roe 

Certified  Public  Acco\antant . 

It  Is  sometimes  desired  to  make  specific  reference  In 
the  certificate  to  certain  features  of  the  audit;  also  to  bring 
out  the  fact  that  the  books  are  In  agreement  with  the  accoiints 
as  stated.  These  points  are  exemplified  in  the  following: 

New  York,  March  10,  1920. 

To  the  Stockholders  of 
John  Doe  &  Company,  Inc. 

I  have  made  an  audit  of  the  accounts  of  your  Company  for 
the  year  ended  December  31,  1919,  including  verification  of  all 
accounts  representing  cash  and  securities  as  of  December  31, 
1919,  either  by  physical  exsunlnation  of  such  assets  or  by  ob- 
taining certifications  of  depositaries  and  trustees  as  to  their 
custody,  and  also  including  detailed  examination  of  all  charges 
to  capital  accounts  during  the  year;  and  I  Certify  that,  in  my 
opinion,  the  accompanying  Balance  Sheet  and  Statement  of  Income 
and  Profit  and  Loss  are  correct,  and  that  the  books  are  In 
agreement  therewith. 

(signed)  Richard  Roe 

Certified  Public  Acco\intant. 


227 

Following  are  forms  of  the  audit  certificate  typed  at 
the  bottom  of  a  balance  sheet: 

CERTIFIGATS  OF  AUDIT 

I  have  audited  the  accounts  of  John  Doe  &  Company  for  the 
year  ended  December  31,  1919,  and  certify  that,  in  my  opinion, 
the  above  Balance  Sheet  is  correct . 

(Signed;  Richard  Roe 

Certified  Public  Accountant. 
New  York, 

March  10,  1920. 

CERTIFICATE  OF  AUDIT 

Having  audited  the  accounts  of  John  Doe  &  Company  for  the 
year  ended  December  31,  1919,  and  for  several  years  prior  thereto, 
I  certify  that  the  above  Balance  Sheet  and  the  accompanying  State- 
ment of  Income  and  Profit  and  Loss  are  correct. 

(signed)  Richard  Roe 

Certified  Public  Accountant. 
New  York, 

March  10,  1920. 

CERTIFICATE 

We  have  examined  the  accounts  of  The  Black  &  White  Company 
as  of  December  31,  1919. 


228 

No  provision  has  been  made  for  depreciation,  for  Federal 
taxes,  or  for  such  loss  as  may  be  sustained  on  account  of  pending 
litigation. 

WE  HEREBY  CERTIFY  that,  with  the  foregoing  exceptions,  and 
subject  to  the  Company's  valuation  of  inventories,  in  our  opinion, 
the  above  Balance  Sheet  is  correct. 

(signed)        Gray  &  Brown 

Certified  Public  Accountants. 
New  York, 

March  10,  1920. 

CERTIFIpATE 

We  have  audited  the  accounts  of  Black,  White  &  Company  as  of 
December  31,  1919;  have  tested  the  computations  and  prices  of  the 
inventories,  which  were  taken  by  employees  of  the  Corapany  and 
valued  at  cost;  have  certified  the  cash  balances  and  securities; 
have  examined  all  charges  to  property  accounts;  and 

WE  CERTIFY  that,  in  our  opinion,  the  above  Balance  Sheet  is 
a  true  and  correct  statement  of  the  Company's  financial  condition 
at  December  31,  1919,  and  that  the  books  of  the  Company  are  m 
agreement  therewith. 

(Signed)        Gray  3i   Brown 

Certified  Public  Accountants. 
New  York, 

March  10,  1920. 


229 


It  will  be  seen  that  there  Is  a  great  variety  of  forms 
of  certificate  in  use.  The  form -should  be  adapted  in  each  case 
to  the  peculiar  conditions.   It  will  frequently  be  foxind  that  the 
by-laws  of  a  company  require  that  a  certified  public  accountant 
be  employed  and  that  he  shall  report  upon  certain  specific 
matters  or  in  certain  language.   For  example,  one  company  re- 
quires that  the  certificate  state  that  the  "balance  sheet  is  a 
full  and  fair  balance  sheet,  and  properly  drawn  up  so  as  to  ex- 
hibit a  true  and  correct  view  of  the  state  of  the  corporation's 
affairs."  The  English  form 'of  certificate  which  is  used  in  re- 
ports  on  audits  of  companies  rsads  in  part  somewhat  as  follows: 
"VTe  certify  that,  in  our  opinion,  the  attached  balance  sheet  is 
properly  drawn  up  so  as  to  exhibit  a  true  and  correct  view  of 
the  state  of  the  company's  affairs,  according  to  the  best  of  our 
information  and  the  explanations  given  to  us,  and  as  shown  by 
the  books  of  the  company." 

QUALIFICATIONS 

The  expression  "in  our  opinion"  is  in  quite  general 
use.   It  hardly  amoionts  to  a  qualification,  as  it  is  utterly 
impossible  for  any  one  to  express  more  than  an  opinion  regard- 
ing most  balance  sheets.  The  phrase  may  be  dispensed  with  if 
desired,  unlsss  the  statement  which  is  being  certified  to  con- 
tains some  itsm  which  particularly  represents  the  accovmtant 's 
opinion,  ilost  clients  regard  the  expression  as  innocuous,  and 
therefore,  unobjectionable. 


f 


V.> 


230 


When  certifying  to  the  correctness  of  a  statement  it  is 
considered  proper  to  regard  as  part  of  the  statement  any  footnotes 
and  other  explanatory  or  qualifying  remarks  appearing  thereon. 
Qualifications  regarding  inventories  may  be  taken  to  illustrate 
this  practice.   It  is  comparatively  seldom  that  auditors  are  en- 
gaged to  supervise  the  taking  of  physical  inventories,  so  that  in 
most  cases  it  is  impracticable  for  the  auditor  to  form  a  very  con- 
clusive opinion  regarding  the  acciiracy  of  the  inventories  as  to 
quantities,  and  it  may  be  necessary  for  him  to  relieve  himself  of 
responsibility  on  this  point  by  inserting  a  qualification  in  the 
certificate. 

Some  accountants  always  qualify  the  certificate  as  to 
the  quamtitative  feature  of  inventories;  others  make  no  mention 
of  it,  believing  that  they  are  not  expected  to  verify  quantities 
and  that  every  one  reading  the  report  la  charged  with  knowledge 
of  the  usual  practice  in  that  respect;  and  still  others  indicate 
any  qualifications  in  the  balance  sheet  item.   It  appears  that 
the  best  practice  in  most  cases  is  to  qualify  the  balance  sheet 
item  whenever  any  qualification  is  regarded  as  necessary. 
Assuming  that  it  is  impossible  without  the  expenditure  of  a 
great  deal  of  time  to  form  an  intelligent  opinion  regarding 
the  approximate  correctness  of  the  quantitative  feature  of  the 
inventory  as  a  whole  or  in  certain  parts,  and  that  inquiry  con- 
cerning the  method  pursued  in  the  taking  of  the  inventory  does 
not  convince  of  its  accuracy,  the  question  still  remains  ae  to 
the  expediency  of  qualifying  the  report  in  view  of  the  under- 


231 

standing  with  the  client  emd.  the  size  of  the  business.   If  the 

accountant  decides  that  he  should  protect  himself,  or  others, 

and  if  he  has  no  special  reason  for  doubting  the  accuracy  of  the 

inventories,  he  may  state  the  items  in  the  balance  sheet  which 

is  being  certified  somewhat  as  follows: 

Inventories  as  Taken  by  the  Company: 
Finished  Goods 
Work  in  Process 
Materials  and  Supplies. 

If,  in  addition,  the  acco\intant  has  been  unable  to  form  an 
opinion  regarding  the  accxuracy  of  the  inventory  prices,  or  if 
he  has  been  definitely  instructed  not  to  undertake  their  veri- 
fication, he  may  state  the  balance  sheet  caption  thus:   "Inven- 
tories as  taken  and  valued  by  the  company."   If  physical  in- 
ventories have  not  been  taken,  the  item  may  be  expressed  as 
"Inventories  -  Book  Value." 

The  practice  of  qualifying  the  balance  sheet  itself 
may  apply  to  any  of  its  items,  and  will  be  found  quite  effec- 
tive.  There  are  cases,  however,  when  it  seems  necessary  to 
emphasize  qualifications  by  repeating  them  in  the  certificate. 


232 


CHAPTER  VIII 

PRESENTATIONS 

TWO  GENERAL  PPJICTICES 

There  are  two  general  practices  with  regard  to  the 
form  of  presentation  of  audit  reports.   In  both,  the  client  is 
formally  advised  that  the  audit  has  been  made  and  a  table  of 
contents  of  the  report,  as  to  statements,  is  given.   Perhaps 
the  majority  of  accoiinting  firms  then  follov/  immediately  v/ith 
their  comments  (which  are  often  concluded  with  a  certificate), 
all  appearing  above  the  signature.   Manifestly,  the  comments 
will  then  be  read  before  the  statements,  which  are  regarded  by 
the  great  majority  of  accountants  as  the  most  important  part 
of  thvjir  reportSjk  with  the  possible  exception  cf  their  certifi- 
cates.  The  alternative  method,  which  is  preferred  by  the 
author,  is  to  submit  the  comments  as  a  separate  part  of  the  re- 
port, completing  the  presentation  with  the  signature  without 
inclusion  of  the  comments  except  by  reference  in  the  table  of 
contents.   By  this  method  greater  prominence  is  given  to  the 
statements  -.vithout  relegating  the  text  matter  to  an  inconspicu- 
ous place.   This  procedure  is,  of  course,  subject  to  change  in 
exceptional  cases;  in  fact,  exceptions  are  so  common  in  almost 
all  phases  of  the  subject  that  it  is  sometimes  difficult  to  ^es 
above  them  to  what  is  regarded  as  the  rule. 

Whichever  method  is  adopted,  the  part  of  the  report 
appearing  above  the  signature  should  contain  a  terse  description 


233 


of  the  work  aon"   -.nd  show  what  la  rendered  therewith.   This  latter 
shouia  tj  30  axplicit  that  no  misunderstanding  can  possibly  arise 
concerr.ir.f-  what  ocuetitutes  the  report.   The  8ub;3ot  of  safeguards 
is  GOVC'r-3^  more  fully  in  Chapter  IX. 

When  the  first  part  of  the  report  is  limited  to  a  formal 
statement  of  what  has  been  done  and  v/hat  accompanies  it  as  compris- 
ing-  the  report,  it  is  variously  described  as  the  letter,  introduc- 
tion, or  presentation.   The  word  "presentation"  seems  to  be  most 
appropriate  and  la  employed  in  this  work. 

FOIUIS  OF  PRESENTATION 

In  the  succeeding  pages  are  illustrated  a  n\imber  of 
forms  of  presentation,  designed  to  show  the  treatment  under  vary- 
ing conditions  as  to  the  number  and  character  of  statements 
rendered  and  the  scope  and  purpose  of  the  work  performed. 

Following  is  a  form  of  presentation  that  may  be  used, 
with  amplification  if  necessary,  in  the  great  majority  of  cases: 

New  York,  March  10,  1920. 

I^ossrs.  John  Doe  &  Company, 

Nev/  York. 
Pear  Sirs: 

Pursuant  to  engagement,  I  have  made  an  audit  of  your 
accounts  for  the  year  ended  December  31,  1919,  and  submit  here- 
with six  pages  of  comments  and  the  following  described  exhibits: 

EXHIBIT 

"A"  -  BALANCE  SHEET,  DECEMBER  31,  1919. 


I 


234 


"B"  -  STATEI.IENT  OF  INCOilE  AND  PROFIT  AIJD  LOSS 
FOR  TSE  YEAR  ENDED  DECEMBER  31,  1919. 

Yours  truly, 

(Signed)   Richard  Roe, 

Certified  Public  Accountant. 

The  following  illustrates  a  more  elaborate  report  as  to 
statements,  and  also  exemplifies  the  procedure  in  case  only  car- 
tain  qualifying  comments  are  to  be  rendered: 

New  York,    IJarch  10,    1920. 

Llr.    John  Doe, 

President,  John  Doe  S<   Company,  Inc., 
ITsw  York. 
Dear  Sir: 

In  accordance  with  your  request,  I  have  audited  the  ac- 
counts of  John  Doe  &  Company,  Inc.,  for  the  year  ended  December 
31,  1919,  and  submit  herewith  my  certificate  and  the  following 
described  exhibits,  schedules,  and  statement: 

EXHIBIT 

"A"  -  BALANCE  SHEET,  DECEMBER  31,  1919. 
Schedule 

tJ=1   -  Receipts  and  Expenditures  on 
Uncompleted  Contracts. 
2  -  Notes  Payable. 

"E"  -  sltj::ary  of  incomi;  and  profit  a::d  loss 

FOR  THE  year  ENDED  DECEifflER  31,    1919. 
Schedule 

#1  -  Profit  on  Completed  Contracts. 
2  -  General  Expense 5. 
Statement 

#1  -  Branch  Office  Expenses. 


I 


235 

"C"  -  JOURITAL  ENTRIES  NECESSARY  TO  ADJUST  THE 
BOOKS  AS  OF  DECEMBER  31,  1919,  TO  CON- 
FORM TO  EXHIBIT  "A". 

The  Company's  equipment  was  revalued  by  its  officers 
as  of  December  31,  IS 19,  resulting  In  a  credit  to  Profit  and 
Loss  of  $100,000.00.   It  appears  that  this  appreciation  repre- 
sents the  increase  in  replacement  values  due  to  abnorf.Jil  condi- 
tions. 

The  valuation  of  materials  and  supplies  as  of  December 
31,  1919,  13  as  shovTO  by  the  books,  no  physical  inventory  having 
been  taken.  Teats  of  the  Inventory  records  indicate  that  they 
are  approximately  correct. 

Yours  truly, 

(Signed)  Richard  Roe, 

Certified  Public  Accountant. 

Following  is  a  form  of  presentation  covering  the  audit 
of  a  group  of  companies: 

New  York,  ^larch  10,  1920. 

ilr.  John  Doe, 

President,  The  A.  B.  Corporation, 
Ne-.v  York. 
Dear  Sir: 

PursTiant  to  engagement,  I  have  audited,  for  the  period 
from  July  1,  1918,  to  December  31,  1919,  the  books  and  accounts 
of  The  A.  B.  Corporation  and  its  subsidiary  companies.  The  C.  D. 


236 


Company  and  E.  F.  &  Company,  Inc.  (the  latter  from  the   commence- 
ment of  tusiness,  Llarch  15,  1919),  and  submit  heraiVith  sevan 
pages  of  comments,  my  certificate,  and  the  following  described 
exhibitij: 


THE  A.  3.  CORPORATION 
AND  SUBSIDIARY  COLiPANIES 

EXHIBIT 

"A"  -  CONSOLIDATED  BALANCE  SHEET,  DECEIIBER  31, 
1919. 

"B"  -  SU:.IMARY  OF  CONSOLIDATED  INCOLIE  AND 

PROFIT  AND  LOSS,  BY  PERIODS,  FROi.1  JULY  1, 
1918,  TO  DECEI/IBSR  31,  1919. 


THE  C.  D.  COMPANY 


"C"   -  BALANCE   SHEET,    DECEMBER  31,    1919,    AND 
JUNE  30,    1918,    AND  COI^IPARISON. 

"D"  -  STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS, 
BY  PERIODS,  FROM  JULY  1,  1918,  TO 
DECEMBER  31,  1919. 


E.  F.  &  COLTANY,  INC. 


"E"    -   BALANCE   SHEET,    DECEMBER  31,    1919. 

"F"    -    STATELIENT   OF   INCOME  AND  PROFIT   AND   LOSS, 
FROM  THE   COiD/ENCEIiTiSNT   OF  BUSINESS, 
MARCH  15.    191S,    TO   DECEMBER  31,    1919. 


Yours  truly, 

(Signed)     Richard  Roe, 

Certified  Public  Accountant 


237 

Following  is  a  form  of  prssantation  covering  a  balance 
sheet  audit,  where  only  one  statement  is  rendered: 

New  York,  March  10,  1920. 

Messrs.  Black  and  White, 

New  York. 
Dear  Sirs: 

Pursuant  to  engagement,  we  have  made  an  audit  of  your 
accounts  as  of  December  31,  1919,  and  submit  herev/ith  three  pages 
of  comments  and  a  - 

BALANCE  SHEET,  DECEMBER  31,  1919. 

Yours  truly, 

(Signed)   Gray  &  Brown. 

The  following  illustrates  the  manner  of  showing,  with- 
out any  comments,  exhibits  and  schedules  with  different  dates: 

New  York,  March  10,  1920. 

The  Black  &  TThite  Company, 

New  York. 
Dear  Sirs: 

Pursuant  to  engagement,  we  have  audited  the  accounts 
of  The  A.  B.  Corporation  for  the  year  ended  December  31,  1919, 
and  submit  herewith  our  certificate  and  the  following  described 
exhibits  and  schedules: 


I 


238 

EXHIBIT 

"A"  -  BALANCE  SHEET,  DECEilBER  31,  1919  AND 
1918,  AND  COMPARISON. 
Schedule 

#1  -  Investment  Securities, 
December  31,  1919. 

"B"  -  STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS 
FOR  THE  YEARS  ENDED  DECEMBER  31,  1919 
AND  1918,  AND  COMPARISON. 
Schedule 

#1  -  Cost  of  Goods  Sold  for  the 

Year  Ended  December  31,  1919. 

Yours  trtilyi 

(Signed)   Gray  &  Brown. 

The  following  form  suggests  further  variations: 

New  York,  March  10,  1920. 

Messrs.  Black  &  Uhite, 

New  York. 
Dear  Sirs: 

Pursuant  to  engagement,  v/e  have  made  an  exsunination 
for  the  purpose  of  verifying  your  assets  and  liabilities  as  of 
December  31,  1919,  and  submit  herewith  the  following  described 
exhibits  and  schedule: 


EXHIBIT 

"A"  -  BALANCE  SHEET,  DECEMBER  31,  1919, 
WITH  CERTIFICATE. 
Schedule 

#1  -  Bonds,  Stocks,  and  Other 
Securities  Owned. 


239 


"B"  -  STATEMENT  OF  INCOME  FOR  THE  YEAR  ENDED 
DECEIffiER  31,  IS  19  (Prepared  from  the 
books  without  verification) . 

Yours  truly, 

(Signed)   Gray  &  Brown, 

Certified  Public  Accoxintants. 


A  form  similar  to  the  following  may  be  used  in  ci3rtain 
cases: 

New  York,  June  10,  1920. 

Messrs.  John  Doe  and  Richard  Roe, 

Auditing  CoK.mittee,  The  Blank  Trust  Company, 

New  York. 
Dear  Sirs: 

In  accordance  with  your  request,  we  have  collaborated 
with  you  in  examining  the  accounts  of  The  Blank  Trust  Company 
as  of  the  close  of  business  May  27,  1920.  We  covmted  the  cash 
and  cash  items  on  hand  and  ascertained  that  the  cash  itei;.s  were 
properly  disposed  of;  we  verified  the  cash  balances  and  collec- 
tion items  In  the  accounts  due  to  and  from  other  banks  and 
trust  companies;  we  Inspected  the  evidences  of  loans  and  the 
collateral  thereto  as  called  for  by  the  records,  and  found 
that  all  collateral  loans  are  properly  secured,  as  indicated  by 
the  most  reliable  quotations  available  (those  other  than  pub- 
lished quotations  having  been  discussed  with  you);  we  verified 
the  investment  securities  and  found  that  the  market  value  was 


240 

$27,633.19  less  than  the  book  value;  we  ascertained  that  the 
aggregates  of  the  several  classes  of  deposits  as  shown  by  the 
general  books  wore  in  agreement  with  the  detail  accounts,  but 
did  not  requast  confirmation  of  the  balances  by  the  depositors; 
we  accounted  for  all  seciirities  and  other  property  held  in 
trust  and  for  safe-keeping  as  shown  by  the  records. 

The  records  are  suited  to  the  needs  of  the  company, 
and  are  well  kept. 

We  submit  herewith  a  Statement  of  Financial  Condition 
at  the  close  of  business  May  27,  1920. 

Yours  truly, 

(signed)   Gray  &.   Brown. 

The  following  form  illustrates  the  method  of  qualify- 
ing the  report  with  respect  to  the  source  of  the  information 
contained  in  the  statements: 

New  York,  March  x^,  19^0. 

The  A.  B.  Corporation, 

New  York. 
Dear  Sirs: 

Pursuant  to  engagement,  we  have  audit^^a,  for  the  year 
ended  December  31,  1919,  the  books  and  accounts  of  The  A.  B. 
Corporation,  and  have  audited  the  New  York  books  and  accounts 
of  its  subsidiary  companies.  The  C.  D.  Company  and  E.  F.  &  Company, 


241 


Inc.,  accepting  the  rsports  of  foreign  ropreasntativss  n.nd  othsr 
accountants  relating  to  their  operations.  We  submit  here./ith 
six  pag33  of  comments  and  the  following  described  exhibits: 


EXHIBIT 

"A"    -   CONSOLIDATED  BALANCE   SHEET,    DECELIDER  31, 
1919. 

"B"    -    SULILIARY   OF   COIISOLIDATED   IIICCIIE  AND 

PROF-IT   AND   LOSS  FOR  THE   YEAR  ElIDllD 
DECEIvIBER  31,    1919. 


Yours  truly, 

(Signed)   Gray  3<  Brovvn. 

INDEXING  OF  PARTS  OF  REPORT 

Some  accountants,  especially  in  elaborate  reports, 
number  each  page  and  index  the  several  parts  on  the  presenta- 
tion, somewhat  as  follov7s  (the  full  descriptions  of  the  state- 
ments being  also  shown): 

Pa£j 


Certificate 

1 

Comments 

2-10 

Exhibit    "A" 

11 

Schedule  #1 

12-13 

Schedule  if2 

14-15 

Exhibit    "B" 

16 

In  the  great  majority  of  reports  the  extra  labor  in- 
volved in  this  procedure  appears  to  be  unwarranted,  especially 


242 


If  the  designations  of  folded  statements  be  also  shown  on  the 
outside. 

If  a  report  is  to  be  rendered  in  which  there  are  no 
statements,  but  voluminous  text  matter,  the  whole  report  should 
be  made  in  the  form  of  a  letter,  signed  at  the  end. 


243 


CHAPTER  IX 
MECHANICAL  FEATURES  AND  OFFICE  PROCEDURE 

SAFEGUARDS  AGAINST  MISUSE  OF  REPORTS 

Much  has  been  said  and  written  concerning  the  safe- 
guarding of  audit  reports  against  their  misuse  by  unscrupulous 
persons.   Some  accountants  employ  various  kinds  of  seals  on 
their  reports  so  that  no  part  thereof  may  be  extracted  without 
mutilating  the  sheet  o:^  breaking  the  seal;  others  have  imprinted 
on  each  sheet  of  the  statements  words  to  the  effect  that  such 
statements  must  be  considered  only  in  conjunction  with  the  ac- 
companying comments  and  that  they  may  be  used  separately  only  by 
permission  of  the  accountant.  While  some  of  these  safeguards 
may  be  effective  and  also  consistent  with  the  professional  charac- 
ter of  the  reports,  in  the  opinion  of  the  authoY  adequate  pro- 
tection for  all  interests  concerned  may  be  obtained  by  making 
the  introduction  to  a  report,  which  is  signed  by  the  account- 
ant, explicit  as  to  the  composition  of  the  report.  As  a  further 
precaution,  however,  each  sheet  of  the  report  may  be  water- 
marked or  imprinted  with  the  name  of  the  acco\:ntant. 

If  a  detached  statement  is  submitted  to  a  third  person 
as  having  been  received  from  a  professional  accountant,  that 
person  may  know  that  the  statement  is  authentic  if  the  sheet  is 
water-marked  or  imprinted  with  the  name  of  the  accountant,  but 
unless  the  practice  of  thus  marking  the  sheets  is  general  and  is 
widely  knovm,  he  may  not  be  able  tc  detect  a  spurious  statement 


244 

that  is  not  so  marked;  however,  in  any  event,  it  seems  that 
ordinary  business  caution  would  lead  the  third  person  to  demand 
evidence  that  the  statement  was  not  improperly  extracted  from  a 
report  that  might  contain  qualifications,  by  insistence  upon 
seeing  the  signature  of  the  accountant.  The  author  has  yet  to 
hear  of  a  case  where  such  improper  use  has  been  made  of  part  of 
a  signed  report  of  a  professional  accountant.   If  the  question 
were  serious  perhaps  it  would  be  advisable  not  to  use  any  mark 
of  identification  on  the  paper,  as  there  would  then  be  no  evi- 
dence that  the  statement  was  prepared  by  an  accovintant. 

It  is  likely  that  nearly  all  cases  of  misuse  of  ac- 
co\antants'  statements  by  imscrupulous  or  careless  persons  arise 
from  misplaced  confidence  by  the  accountants  in  giving  out 
statements  informally  -  perhaps  pencil  drafts  for  bookkeeping 
purposes  -  which  are  typewritten  and  submitted  as  having  been 
prepared  by  the  accoxintant.  While  in  such  cases  no  fault  can 
be  attributed  to  the  accountamt,  in  the  opinion  of  the  author 
nothing  that  might  possibly  be  construed  as  a  report  should  be 
rendered  except  over  the  accountant's  signature,  with  appro- 
priate qvialif ications  if  necessary. 

In  short,  the  only  practical  safeguard  lies  in  the 
accountant's  attaching  his  signature  to  nothing  for  which  he 
does  not  assume  responsibility,  and  to  everything  which  might 
be  construed  as  a  report,  including  all  carbon  copies. 

As  previously  stated,  if  a  certificate  is  appended 
to  a  statement  the  client  could  not  be  criticized  for  exhibit- 


i^ 


245 


ing  the  certified  statomant  as  the  report  of  the  accountant,  for 
the  reason  that  any  material  qualifications  should  be  contained 
in  the  certificate. 

PAPER  AND  BINDING 

It  ia  entirely  a  riatter  of  personal  preference  as  to 
what  kind  of  paper  shall  be  used  and  how  reports  shall  be  bound. 
However,  the  paper  should  be  thin  enoun;h  to  make  several  good 
carbon  copies  and  still  be  of  sufficiently  good  quality  to  with- 
stand erasures  and  to  permit  of  v;riting  ./ith  a  pen.   Onion-skin 
paper  has  proved  to  be  satisfactory. 

Various  sizes  of  paper  are  in  uje  by  accountants, 
ranging  from  letter  size,  8-1/2"  x  11",  to  about  9-1/4"  x  13" 
and  8-1/2"  x  14".  VThen  the  reports  are  bound  at  the  top  an 
8-1/2  inch  sheet  is  generally  used;  if  they  are  bound  at  the 
side  at  least  a  half-inch  more  inargin  must  be  left,  so  that  a 
nine-inch  sheet  is  none  too  wiae.  Well-proportioned  sizes  are 
9"  X  IZ''  to  14"  if  bound  at  the  side,  and  8-1/2"  x  12"  to  14" 
if  bound  at  the  top.   It  ia  thought  that  fourteen  inches  ia  a 
good  length,  as  most  statemeni^s  seam  to  require  that  much 
space  without  crowding.   In  the  determination  of  the  size  of 
the  paper,  consideration  should  be  given  to  economy  in  pur- 
chasing; 8-1/2"  X  11"  or  14"  and  multiples  thereof  are  stock 

3lZ3S. 

The  majority  of  accountants  bind  their  reports  at 
the  side,  with  a  paper  cover  and  eyelet  fasteners.   Some  use 


246 


leather  covers,  imprinted  in  gold.  There  are  many  different  de- 
vices and  methods  of  folding  covers  for  securely  fastening  the 
sheets,  which  will  not  be  discussed  in  detail.  Whether  the  bind- 
ing be  at  the  side  or  the  top,  it  is  necessary,  in  using  large 
sheets  which  must  be  folded,  to  cut  off  part  of  the  sheet  for 
binding,  the  only  difference  being  that  in  one  case  they  are 
folded  from  the  bottom  and  in  the  other  from  the  side. 

OFFICE  PROCEDURE 

It  is  desirable  in  all  oases  to  have  the  report  reviewed 
and  criticized  by  some  person  other  than  the  accountant  who  has 
v:ritten  it. 

TThen  the  several  parts  of  the  report  have  been  type- 
written they  should  be  carefully  compared  with  the  rough  draft. 
It  has  been  found  to  be  good  practice  to  use  the  last  caurbon  copy 
as  an  office  copy  on  which  to  indicate  corrections  for  the  typist 
and  the  checking  as  to  mathematical  accuracy  and  otherwise.   It 
is  a  good  rule  not  to  permit  the  typist  to  make  corrections  while 
aZl  copies  are  in  the  machine  as  there  is  a  possibility  of  fail- 
ure to  correct  some  of  the  copies.  After  comparing,  every  com- 
putation in  the  report  should  be  checked  on  the  office  or  "prov- 
ing" copy.   In  some  cases  it  is  desirable  to  check  computations 
such  as  percentages  before  typing,  but  unusual  care  should  then 
be  exercised  in  comparing. 

Every  figure  appearing  in  comments,  certificates,  or 
footnotes  tc  statements,  which  is  not  susceptible  of  verification 
by  mathematical  process,  as  v/ell  as  all  dates,  should  be  checked 


24-7 


to  authoritative  sources  -  the  statements  or  working  papers.   All 
rsferences  in  one  statement  to  another,  such  as  the  surplus  at 
the  enl  of  the  period  and  the  totals  of  schedules,  should  be 
checked.   In  comparative  statements,  the  prior  figures,  or  com- 
parisons therev/ith,  should  be  checked  to  the  preceding  report  if 
any.   The  contents  of  the  report  as  to  the  number  of  pages  of 
comirients  and  the  titles  of  statements,  as  shown  in  the  presenta- 
tion, should  be  checked.   All  corrections  of  typing  should  be 
checked,  care  being  exercised  to  see  that  all  copies  have  been 
corrected.   In  short,  every  possible  precaution  should  be  taken 
to  insure  accuracy  of  the  report,  as  a  clerical  or  typographical 
error  may  make  a  very  bad  impression  upon  the  client. 

Some  accountants  use  red  ink  in  ruling  typewritten 
statements,  horizontally  and  perpendicularly,  and  in  underscor- 
ing the  captions.   In  the  opinion  of  the  author,  horizontal 
lines  made  by  the  typewriter,  including  underscores  where  neces- 
sary, present  a  better  appearance,  and  no  perpendicular  lines 
ar^  required. 

Imprinting  in  rod  on  the  carbon  copies,  as  .'/ell  as  on 
the  original,  may  be  done  by  inserting  pieces  of  red  carbon. 
It  is  desirable  to  type  reference  characters  in  red,  as  black 
characters,  especially  on  the  carbon  copies,  are  not  conspicuous. 

The  designation  of  the  Exhibit,  Schedule,  or  Statement 
should  be  typed  on  the  outside  of  folded  statements. 

It  is  important  to  keep  a  record  in  the  office  showing 
the  disposal  of  each  copy  of  the  report . 


I 


'  JWN  C     1936} 


Form  I-,-9-35in-8,'28 


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